After climbing steadily for much of the year, stock prices took a turn this week.
On May 17, the Dow Jones Industrial Index (which tracks 30 of the largest U.S.-based companies) fell about 370 points, or nearly 2 percent. And the S&P 500, which tracks 500 stocks, shed 2.6 percent of its value—its worst loss since last September. By Thursday, stocks had already started to recover, but the market was still choppy.
So what happened?
Analysts point to recent reports, and the appointment of a special prosecutor, looking into potential ties between President Trump’s campaign and Russian officials. That’s left investors feeling uncertain about the administration’s ability to push through tax reform and other business-friendly parts of its agenda.
Andy Brenner, head of international fixed income securities at National Alliance Securities, said in a note that the hiring of a special prosecutor “and talk about obstruction of justice being an impeachable offense” could push back efforts to enact Trump’s tax reform and fiscal stimulus proposals for months.
All of that translates to a lot of uncertainty—and the market hates uncertainty.
What should you do?
Not much, if you’re comfortable with your investing strategy. “If you’re invested wisely in a diversified portfolio, you will easily be able to ride out this short storm,” says New York-based Certified Financial Planner and Francis Financial founder Stacy Francis, citing Warren Buffett’s recent advice not to mix politics with investment decisions.
And panic-selling is never a good idea. “Losses only become real when you take your money out,” points out Saundra Davis, MSFP, a financial educator in California.
Take a cue from history.
The market has dropped several times in the last year and recovered each time. In the days after the United Kingdom’s decision in June to leave the European Union (or “Brexit”), the Dow fell nearly 5 percent to 17,140. But the major indexes had fully recovered by the following week, and continued to climb. Even after Wednesday’s drop, the Dow was still around 20,600 points.
Step back further and the downs—and ups—are even more pronounced. Since 1926, we’ve seen a lot of bear markets, including a 52-percent drop in the S&P 500 index between 2007 and 2008. But the market has recovered from each one. Over the period from 1926 through 2013, the average annual return on stocks was 10.2 percent.
“If you’re going to invest, weathering downturns must be part of [it],” says Davis. Your investment strategy should be focused on the long term and “allow you to feel confident in your ability to stay the course when the markets are erratic.”
What should be in your portfolio?
A diverse mix of investments that fits your risk level and timeline: generally, heavier in stocks than bonds when you have a long-term horizon. Even among stocks, you can mix U.S. and international stocks and small-, mid- and large-sized company stocks in different sectors. Including both government and corporate bonds in your portfolio can further diversify it.
“Your portfolio is like your life jacket giving you confidence in stormy seas,” says Francis. “This storm we’re having will pass and a calm will follow…The most important thing is to have a life jacket.”
And if you don’t have much money in the stock market? “For those in cash and sitting on the sidelines, this is an opportunity to put your money to work while stocks are on sale,” she adds.