Wise Wealth Management

Dennis Covington | Principal

Insights on the keys to enjoying a "healthy wealth".

Perspective on a Market Pullback

January 2016

The first few trading days of 2016 have seen volatility return to the stock market. The recent downturn has been attributed primarily to fears of a slowdown in the Chinese economy and a continuing slide in the energy (oil and gas) sector. Short-term traders are making bets on the impacts that these and other events may have on the global economy, and this is spiking volatility in stocks around the world.

It is vitally important, however, that long-term investors not get caught up in this short-term trading mentality. The concerns about the Chinese economy and sliding oil prices are not new; the market grappled with them for much of last year. Moreover, downturns of this magnitude - whatever the reason - are not as unusual. In fact, pullbacks of 5% or more typically occur several times per year in the market. Source: JP Morgan Asset Management 

Furthermore, as illustrated in the chart below, there have been numerous major pullbacks during the past five years - even as the S&P 500 nearly doubled in value.    Source: JP Morgan Asset Management 

During each one of these pullbacks, the causes attributed to them were often presented as dire by the financial media. Yet in hindsight we can hardly remember the source of concern.

Pullbacks such as these may tempt investors to flee stocks, but history shows that attempting to time the market actually increases risk for an investor versus staying the course and riding out the volatility. It is important to remember, then, that diversification and a long-term perspective are the keys to riding out volatile times in the market.

If you have any questions about your financial plan and portfolio strategy, please do not hesitate to contact us. 

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