The Sky is Falling...or is it? Are Today’s Investors Playing the Part of Chicken Little?

Please note that the opinions expressed in this blog are my own. They in no way reflect the opinions of ByAllAccounts or any other employee at ByAllAccounts. You may disagree with some of my conclusions, but in all cases, I welcome your comments and critique.  

Okay, so I am not a CFA, CFP, IMCA…but I have been in the financial industry for 20 years, including 15 years at Financial Advisory firms. During this time, I’ve seen what every investor and member of the financial services industry has seen: the market in all of its ups and downs. Yet in spite of the constant fluctuation, and the fact that the fluctuation is the one constant in the market’s behavior, we still hear a common refrain when the market takes a significant dip: “The market is taking a plunge,” the journalists and pundits say. “We are in the midst of an economic crisis.” And more ominously, they imply “If there ever were a time to press the panic button, this is it!”

Somehow, the market always comes back.

It happens every time. Just as quickly as the market dips, it starts to go back up—say after strong earnings reports. Yet, somehow, when the decline is at its steepest and scariest, the market’s return to health seems like an impossibility. Take the situation of the past few days and weeks. Right now, we are back down again—primarily because of concerns about the European debt situation, and fears that the U.S. may be headed into another recession. 

Pretty gloomy, huh? Well, the important thing to note is that it isn’t all bad. If you have cash to invest or you want to rebalance your portfolio, this is the time to do it. Sure, it would be nice to know ahead of time when these opportunities will arise, but lacking a crystal ball, we are all in the same situation. The fact is, it’s a roller coaster ride, so the smart thing to do is make the best of it. (Look at the 5-year chart for the Dow—quite literally, it really does look like a roller coaster.)

Where are we headed? There are a few things to keep in mind…

Will the downward spiral continue for the foreseeable future? Or will the market rebound to at least where it was on July 25th? We shall see. But in the days ahead, here are some factoids worthy of note:

The market dips every August, although sometimes the dip occurs just a bit earlier—in July. Take a look at the Dow averages on an historical basis and you’ll see what I mean. So the recent decline, extreme as it has been, should come as no surprise. Furthermore, I looked at the Dow over the past five years and there are always dips in the market around the end of January to February, and the end of October to November. 

True, sometimes these market dips are quite significant, like the October 2008 decline, and the January through February dip in 2009. But when seen in the larger context of cyclical ups and downs, these events look less unique or more like a discernable market pattern. Of course, I don’t mean to make light of the real anxiety and uncertainty that can permeate the market. The events of 2008 were indeed cataclysmic, but they came and went—and the market returned. (For the sake of accuracy, I must state that 2008 was also different because the summer dip occurred in June and the market rebounded in August.) One more point: Looking at the averages, there appears to be a dip in every quarter except the 2nd quarter. Hmmm…maybe this is because everyone is tired of finances after finishing their taxes!

In any event, my point is simple: Instead of listening to media types rant and rave about the dips in the market—and letting ourselves get twisted up into a knot—maybe we should just buy low and sell high (and enjoy that drink with the umbrella or cold beer while on vacation). 

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