Look At The Big Picture With Your Investments

Have you lost a bunch of paper money in a stock market dump-a-thon? When the market is down over several hundred points or several percentage points in one day, it’s not unusual for people to panic. When market upheavals like this occur, how do you take it?

During one such “event”, our local newspaper polled a number of random people about how they felt about a particular market drop, and following are a few candid thoughts by the respondents. Some of them expressed fear and possible excitement. Others seemed to be anticipating what would happen but remain confused. While others were more calm and ready to justify what was happening. Then there were those who simply shrugged off the market as being a “gamble”.

Of course there was also commentary by several people who believed in investing for the long term, by being patient and staying the course; but there were a good number of statements from nervous nellies as well. It’s interesting to see what volatility does to people; such days test our commitment and forbearance and make us short-sighted pretty quickly.

Try To Maintain Perspective During A Stock Market Rout

Before you worry, it may be a good exercise to look at the real reasons for the unease in the markets. There are quite a good number of reasons for stock market corrections and downtrends, and in each situation, there’s been an eventual recovery.

The general U.S. market may tank due to a variety of factors, such as a combination of international and domestic events, from reports of high speculation in real estate markets to poor economic growth and growing debt. On some other occasions, you may point the finger at good old-fashioned market valuation — when the market runs up too fast too soon.

But you’ll have to determine if these factors are fundamentally damaging enough to hurt the market for a prolonged period of time. Are these reasons enough for you to pull the plug? If you’re investing for a long time horizon, your answer should lean towards the negative.

But if you continue to feel nervous, your view of the market may be myopic. Could you be looking at something like this 5 day VTI (Vanguard US Total Market) chart?

Sure it appears precipitous, but then let’s step back a bit further. Check out the same index going back 3 months rather than just 5 days:

Finally, have a glance at the corresponding 2 year VTI chart, also known as THE BIG PICTURE.

This goes to show you that it’s all a matter of perspective, when you’re gauging and judging the markets. This is just one simple exercise you can do to try to appease your concerns. Of course, this approach is rather simplistic, and may not explain nor predict market expectations for the near term. But it points to the importance of having some perspective when you decide to become an investor. If this kind of volatility is something you can’t deal with, then the stock market may not be the right place for most of your funds.

Seeking The Big Picture & Rationalizing Volatility

I try to view such total market activity from the perspective of a long term investor, but one who takes note of fundamentals in making investing decisions. I wouldn’t consider myself entirely or purely a buy-and-hold investor though because there could be instances when I decide to hedge a bit more or even to do portfolio shifts if long term bear market trends do take hold.

A technical break in the stock market’s movements and a shift in market direction may prompt me to revisit overall economic indicators. If they’re still positive, I’ll assume that the impact of a one day (or few days’) sell off won’t be felt for long and the markets should eventually rebound. It’s when there’s a basic underlying change in the economy that a technical break like this can be the start of something more ominous and potentially damaging to the markets.

Time will tell how a one day slump will turn out. But it will be one of the following:
(1) A blip or non-event (market recovers quickly without a dent in it)
(2) The start of a correction or a drop of at least 10%, but not more than 20%
(3) The start of a correction that eventually presents a buying opportunity
(4) The start of a long term downward trend (bear market activity)

Depending on whom you ask, you may get different answers on what will happen next but the key is to sift through the news and analysis to determine how overall fundamentals are doing. By keeping abreast with such information, you can at least anticipate some general market movements and not get too shocked when equities make like a roller coaster.

When a correction is ongoing, you probably shouldn’t be inspired to bail out unless you’re a trader. I certainly wouldn’t, simply because the best redemption moves should be done as part of a “big picture” or longer term strategy and shouldn’t be done in reaction to some event. As much as possible, your investment moves should be proactive rather than reactive.

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