Barry Glassman has a nice article on Forbes entitled “What To Do When The Stock Market Drops 1800 Points.” In the article, Glassman reminds investors that an 1800-point drop in the Dow is simply a 10% decline in the market. This is a normal decline which happens, on average, every other year.
Perhaps most telling is what he plans to do for his clients when the Dow drops 1800 points:
At Glassman Wealth, our plan is to do nothing. This doesn’t mean that we haven’t been preparing our portfolios all along, it means that we’re not going to panic when the time comes.
In talking with clients about a market correction, I explain that we didn’t think the market was an amazing bargain last year when it was 1800 points lower, so a 10% decline is not necessarily a trigger to go all-in with stocks. It may feel like a huge decline, but put into context, it doesn’t mean that there are big bargains to be had.
If this type of correction will make you freak out, my advice is don’t wait, make your move now. Stalling and then panicking is never a good strategy. Think about what you will do when the market drops by 1800 points. My hope is that you won’t do anything when it actually happens because you will have already made your adjustments.
Are you over weighted in stocks because of the growth in equities over the past few years? If this is the case, now may be a good time to rebalance to the allocation you originally intended. When there is a 10% drop in the market, your plan may be to rebalance at that time and buy at lower prices. Whatever strategy you choose, what I hope you don’t do is to wait, and then when the market drops, freak out and sell. You’ve just locked in your losses.
What should you do now before a market correction? Rebalance.
What should you do after a market correction? Rebalance.
That’s how you get the rebalancing bonus.
Glassman reminds us that it is the financial media which troubles us into moving in the wrong direction:
I’m not going to guess whether the next move in the market is 10% up or down, I just know that at some point a correction will come. When it does, an 1800 point drop will feel terrible, the news will be covering it 24/7, and we’ll stop talking about the Nats because everyone will be talking about the stock market.
Photo used here under Flickr Creative Commons.