While you can usually see a market decline in the making, last week was a bit different. The financial markets have been pleasantly devoid of volatility for more than a year—until last week. The Federal Reserve has been discussing when to raise interest rates, and many believe a September increase is still possible. An increase in Federal Reserve interest rates is a normal reaction to keep inflation in check and inflation is a normal reaction to economic growth, both of which have been anemic lately. Given the strong dollar, problems in international markets, low inflation and growth, coupled with the recent decline in our domestic markets, we believe the probability of a rate increase, at least this September, is very low at this point.
Of course, when the markets drop so dramatically, seemingly reasonable investors become “stupid” when it comes to selling. They want to sell when the price is going down—which is the exact opposite of what an investor should do. The problem is your emotions get in the way. You see your investments going down in value and you want to stop the bleeding before it gets worse. Of course, when the market is having a rally, you want in because you might miss the big jump. Unfortunately by the time you see these big market moves, they’ve already happened.
After Wednesday’s trading action, the S&P’s price to earnings ratio (PE), the most common measure of valuation, was 17.15. The index’s long-term average is 16.1, so the market still looks a little bit expensive. Because the markets are slightly above their historical average, the current selloff is more likely a market correction, not an indication that the economy is falling apart. On average, the market drops at least 10% once a year. The last time that happened was July 2011, so it has been more than four years since the last correction. This is the financial markets doing what they do. That leaves us with the belief this is a market correction—a market event needed to reset investor expectations based on the realities of more challenging global economic and financial market headwinds.
You may have heard this in the past, but we believe it is worth repeating now. If you took away the 10 best trading days in the last 109 years, you’d missed two-thirds of the gain in the market. Likewise, if you had missed the 10 worst days, you would triple your gain. But did you sell the Friday before or did you sell on Monday when the markets were plummeting or Tuesday morning, in hopes of missing another day of red results? If you did, you missed Wednesday, Thursday and Friday’s gains. By trying to time the market, you missed one of the best days of market performance for 2015.
The news over the last week has focused on market declines. The decline is surely newsworthy, but we would like to remind you that these are the times when the Henssler Ten Year Rule can offset the urge to sell during a stock market decline. If you have a financial plan with assets set aside to meet your future spending needs, it should give you some solace. Please feel free to reach out to one of our experts if you have any questions.
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Disclosures: This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
