Pundits who predicted a market correction in early spring were finally proved right, as the Dow Jones Industrial Average dropped below 10,000 in late May. We saw the benchmark index last close below 10,000 in early February this year. Similarly buffeted, the Standard & Poor's 500 and NASDAQ each declined by more than 10 percent. The S&P 500 saw lows in all sectors, with industrials and materials leading the slide downward, alongside the financial sector. It is not hard to determine some of the factors that contributed to the slide: worries about the banking system in Euro-based countries and concerns over tensions in Korea were two major issues.
Setting emotions aside, what are the experts saying about the markets and where do they see positive signs? Here are some issues to mull over:
- The U.S. stock market declined more than 10 percent and hence fits the official definition of a correction. Anytime the market hits a benchmark statistic (either up or down), we see the psychological impact of the change in the days that follow. Resist the urge to join the panicking herd and donÂÂÂ’t give in to knee-jerk impulses. Sticking to your long-term plan is probably your best option; however, review any ideas on shifting money around with your professional tax advisor. The same suggestion applies if you consider the recent correction as a good buying opportunity.
- Stock market volume was light during this period (25 percent below the daily average for May) and equity funds have reported no unusual cash flow activity. This indicates that investors have long-term goals, investment plans and are learning how to wait out periods of volatility.
- DonÂÂÂ’t forget your goal is to buy low and sell high. If your impulse is to take your losses and pull out of the market, bear in mind that markets are volatile from time to time and stick to your long-term plan. Getting back in the market at the right time requires an inspired guess, much research and a bushel of good luck. If timing the market were easy, there would be lots of billionaire market analysts out there.
- Bad news beats good, and recent weeks are no exception. Among all of the negative reports, many investors overlooked some bright spots. For example, U.S. home prices rose 2 percent in the first quarter of 2010. Secondly, U.S economic data for the month was modestly positive. And last, consumer confidence rose in May according to the Conference Board.
What should investors do now? Experts urge individual investors to stay the course. People who take their money out run a heavy risk of missing large stock market gains. Reacting to the news of the day is rarely a good move for individual investors.
Down the road, some experts think that investors might consider rebalancing a portfolio that is light on securities if further declines occur. In this scenario, the focus would be on strategic rebalancing and not emotional reactions. DonÂÂÂ’t hesitate to seek advice from your tax and finance experts.