Investors have been buffeted in 2016, with the U.S. stock market off to its rockiest start in history. China is slowing, oil is tanking, industrial production is lagging and interest rates are falling. It may seem, as Abraham Lincoln wryly observed in 1862, that the bottom is out of the tub. So, is it time to panic?
Of course, the answer is never to panic. But investors can be forgiven for feeling anxious in the midst of so much uncertainty. This natural angst is magnified in an age of cable media accentuating the negative through incautious rhetoric and hyperbole. With the market closed for the MLK holiday, one popular business network produced a segment with the bold title "Markets in turmoil" in blazing red capital letters bracketed by down arrows. Noise, not news.
Photo — Please put this mug shot of Chris Hopkins of Barnett & Co. in our system to use every other Wednesday when it will run with his column.The stock market crash of 1929 was turmoil. The financial crisis of 2007 was turmoil. The present decline, at least so far, qualifies as a mere correction. It happens on average about every 18 months and is a necessary and healthy phase in the longer term growth of equity values. The full extent of the selloff is unknowable and dependent upon developments beyond the control of individual investors. But history suggests that a steady hand on the tiller through such corrections is generally rewarded. Here are a few tips for weathering the storm.
Review your objectives. Take some time to reassess your goals as well as your time horizon. If your primary target is very near term and you have little time to recover from a decline, you should probably hold a smaller allocation in stocks to begin with. But if your time horizon is relatively long (five years), you can afford to be patient and ride out the fluctuations.
Periodically revisiting your risk tolerance is also a necessary exercise. Selecting the appropriate level of risk is partly a function of age and time horizon, but also a matter of personal preference and level of comfort. Investors with a low risk threshold may find it unacceptably stressful to withstand the vagaries of the stock market and therefore wish to limit their exposure.
Average in. If you are comfortable with market risk and appreciate the attraction of buying at a discount, consider wading into compelling positions that have sold off. Most successful long-term investors espouse some variant of Warren Buffet's metaphor about rushing into a burning building as others are running out. Legendary investor (and Tennessee native) Sir John Templeton exhorted investors to buy at the time of maximum pessimism. The level of pessimism may not yet be at a maximum, but that exact moment is knowable only in retrospect.
Take expert forecasts with a grain of salt. In response to the received wisdom that stock market downturns reliably forecast economic slumps, Nobel Laurate Paul Samuelson of MIT quipped that Wall Street indexes had correctly predicted "nine out of the last five recessions." That was in 1966, and the track record has hardly improved. In fact, the U.S. stock market turns out to be poorly correlated with GDP growth in the short run, and "expert" market forecasters are generally no more accurate than amateurs over time.
For most of us mortals, the best approach is to establish a game plan and stick to it, making minor course corrections along the way. If you have a short time frame or a low risk tolerance, you should probably limit your exposure to the market. But for long-term investors with reasonable ability to roll with the ups and downs, periods of volatility as we are currently experiencing often present opportunity.
Christopher A. Hopkins, CFA, is a vice president and portfolio manager for Barnett & Co. in Chattanooga.