Q. Dear Debbie,
Are market pullbacks normal?
A. Absolutely, market pullbacks are indeed normal. Pullbacks occur many times over any given market cycle. Historically speaking, pullbacks in the S&P 500* of five percent occur approximately four times over the course of an average year and pullbacks of 10 percent approximately once per year. Indeed, since 1980, the average intra-year decline is 14.2 percent, with annual returns positive in 27 of 36 years. Smaller drawdowns between two and three percent are more frequent and can occur every few weeks. When viewed over the course of a full market cycle, these fluctuations are less evident.
Often large dips are tied to reports in the media. Recent news regarding China, oil and Fed Fund rates has produced much of the volatility we have seen in recent months and that will probably continue. Yet our economy is doing well and there is no imminent sign of a recession. Naturally, these market drops and volatility can be stressful for investors and I see an uptick in calls from my clients when the market pulls back. Some investors are tempted to pull out just as the market hits a new low and this is often the worst thing to do. As difficult as it might seem, the well diversified investor with long-term investing goals needs to view their portfolio over the long-term. Knee jerk reactions to market volatility that are emotionally based can often lead to bad investment decisions. Changes to your portfolio should be weighed in the context of fundamentals or a change time horizon for example.
I believe worried clients feel much better after we speak with them. Often verbalizing their concerns leads to a discussion as to how their portfolio is (or is not) on track to meet their long term plan. If you are feeling anxious about your investments, you should communicate that to your investment professional and you should make sure you have a plan regarding your anticipated spending needs and source of funds.
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Debbie Taylor, principal of Taylor Financial Group, a Franklin Lakes-based independent wealth management firm, provides the above information. The opinions voiced are solely those of Taylor and do not reflect the views of LPL Financial, nor should they be taken as investment, tax, or estate planning advice for any specific individual. Consult with your own tax, legal or investment professional on how the information may relate to your situation. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.