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Consider Market Correction in Historical Perspective
Last month was a very bad month for stocks. The Dow Jones Industrial Average was down about 6.4% for the month, according to MarketWatch; that is the Dow’s worst monthly performance in more than five years. Other major U.S. indices, such as the Standard & Poor’s 500 and the NASDAQ, were also down significantly for August.
Almost as bad as the declines was the volatility. Investors watched the markets lose hundreds of points one day only to gain hundreds the next and then lose again the day after. Many investors are more than a little nervous.
It is important, though, to look at this in context – both historical and personal. Over the last few years, we have discussed our concern that both China and U.S. stock market valuations were becoming unrealistically high and no longer reflected the real value of the underlying companies. But markets continued on the upswing – in China’s case, a dramatic upswing – until the correction last month.
Historically, the markets tend to correct themselves, returning to more realistic valuations. In the case of the U.S. markets, this most recent correction appears to be a normal part of investing in the market. In China’s case, the market crash appears to be the popping of a bubble – although it is difficult to say because they have so little transparency.
It is also important to note that stocks usually work best as a long-term investment. And over time, they have been the most successful investment. Although they have lagged other traditional investments such as bonds during some periods, over the long haul stocks as an asset class have significantly outperformed most other asset classes. And especially now, in the current low-interest-rate environment, bonds cannot provide sustainable high returns.
It also is helpful to remember the crash of 2008-2009. Before the crisis, on October 9, 2007, the Dow closed at 14,164.53. By March 6, 2009, the Dow had lost 54% of its value, closing at around 6,500. By the end of 2009, it was up 60%. And on Aug. 31, 2015, it closed at 16,528.03.
Perhaps most importantly, though, it is important to remember that your portfolio probably is much different from any one market index such as the Dow. At The Bensman Group, we believe in a disciplined, long-term approach that emphasizes risk management and diversification within and across asset classes. We also believe in rebalancing as needed to keep to the long-term goals that you have set for your investments. This approach cannot shield you completely from market volatility. But it can help to smooth out the highs and lows.
If you have concerns about the markets in general or about your own portfolio, please contact us. We know that these can be scary times, and we would be happy to discuss your concerns and whether you need to make adjustments in your investing approach. You can reach me at 847-572-0808 or firstname.lastname@example.org.