I just invested, why is the market dropping so much!?
The Nasdaq dropped by over 300 points on Wednesday October 10th, its worst performance of 2018. On the 11th, the slide continued as it lost another 90 points and entered correction territory. The Dow dropped 832 points on Wednesday and another 545 points on Thursday, taking its two day slide to over 1300 points. What caused all this? When we value stocks, interests rates form a fundamental part of the numbers. And when they rise, and are expected to continue to rise, it acts as a potential dampener on the economy. Long term rates do appear to be rising, which is creating some concern in the market – which may be compounded with fears of China trade wars, among other things. Additionally, we can look at whether stocks are ‘expensive’, ‘cheap’ or fairly priced. As of close October 10th, the P/E ratio (price of a stock relative to the company’s earnings) of the overall market was around 16.8 while the long term average is around 15.8. What does that mean? It means that stocks are trading at a higher price relative to their profits than in the past. If profits are rising quickly, a higher P/E may be justifiable. There are many other ratios one can use to determine if markets are undervalued or overvalued, but emotions and investor psychology play a role, as does supply of and demand for securities.
How can you reduce the volatility in your portfolio, and take advantage of dips and corrections? Setup a regular purchase plan, purchase investments in various geographies and market sectors, and have a mix of investing styles. For example, leaning towards dividend paying investments has paid off over the long run (as companies are forced to deliver portions of the profits to their shareholders). Investors should keep a portion of their portfolio in fixed income investments which tend to be less volatile than than stocks, though they may go down as interest rates rise. Professional money managers often keep 5% in cash – not a bad idea if you’re still building your comfort with the market! All in all – know what your comfort level is and setup your portfolio accordingly. Seek help if you need it, and send us any questions you may have. You can also send your questions via www.matchworth.com, where Conscious Wealth is one of the featured advisors.
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Source for the above table: https://www.cnbc.com/2018/10/10/us-markets-bond-yields-and-data-in-focus.html