The recent drop in the stock market might have some worried, but we spoke with the experts at Sacramento’s Hanson McLain Advisors on what to expect.
Steve Burnett is the President of Hanson McLain Advisors and has worked in the financial planning business more than 25 years.
What led to the recent stock market dive?
Even though it’s been a few years since a large correction in the United States stock market, they typically happen every year.
“It’s tough to find pockets of the economy that aren’t performing well,” Burnett said.
Burnett attributes the recent dive to profit taking, fear of increasing interest rates and higher wages.
Profit taking is when investors sell off while the market is doing well to guarantee earnings.
Higher wages are typically a good thing for the economy. However, increasing wages can be an indicator of potential inflation which can also frighten investors, Burnett said.
Federal interest rates have been gradually and cautiously increased after the market collapsed in 2008.
What does the recent dive mean?
Not as much as it used to, according to Burnett.
Fifteen years ago when the DOW topped out at 10,000 points, a 1,000 point drop or 10 percent would be significant. However, the DOW banked a record 26,000 points over the last week and a 2,000 point drop from there is comparatively a 7.7 percent drop, which isn’t nearly as significant.
“Right now, I truly believe it’s the behavioral side of seeing large point swings,” said Burnett. “That’s shaking some people up because a 1,000 points or 800 points in a week used to mean a lot. At 26,000 not so much, it’s barely a technical correction.”
Is this a good time to buy?
If you have some extra cash on the side, this could be a good time to play the stock market, Burnett said. The idea of buy low, sell high may be at the top of your mind.
However, financial experts say it is nearly impossible to predict when the current dip will end or if stocks will shoot back up.
“I think what you’re getting too is something that you’ll hear quite common is this the time to buy on the dips? And because no one can actually identify when the dips are over, it could be a great time to buy,” said Burnett.
It could be a great time to buy. Or the market could continue to fall, however, not likely, according to Burnett.
Even if you can time the dip at its lowest point, “It probably is not going to have a material difference on when you invested your lifetime."
What should I invest in?
Diversify your investments. Don’t put all your eggs in one basket.
There are many other things you can invest in besides the stock market that can help you achieve a well-diversified portfolio. Investing in stocks, bonds, commodities, precious metals, real estate and other investments can help you achieve financial security.
“The best one isn’t the one that’s not necessarily going to give you the greatest return, and it’s not the one that gives you the least amount of risk, but it’s the one that allows you to sleep at night, stay invested,” Burnett said. “And most importantly ride through the tough times cause generally if you look at market history, there’s generally more good times than there are bad.”
What should I do next?
“Keep saving, don’t let the short-term market gyrations place so much fear in you that you react emotionally, which is hard to do, and remember, bad markets do not last forever,” said Burnett.