For much of the country, the end of February and the beginning of March brought plenty of wind, rain, sleet and snow. But the stormy weather wasn't confined to the atmosphere - there was also plenty of turbulence in the financial world. As an investor, how should you respond?
Before we answer that question, let's review the recent stock market numbers. In the week of Feb. 26 through March 2, the Dow Jones Industrial Average fell 4.2 percent - the worst weekly percentage drop for the Dow since March 2003.
What caused the correction? Two key factors jump out. First, investors may have reacted to the possibility that Chinese authorities are reigning in market speculation. In a market as big - and as fast-growing - as China, such a move can easily have large ramifications. Another possible cause of the market decline is the news that the United States economy is slowing to a more moderate pace of growth.
Will the decline continue? And, if it does, how far will stock prices fall? No one can really answer these questions with any certainty. Market declines often begin and end without warning. However, regardless of the length and severity of a market downturn, you'll want to consider these moves:
■ FOCUS ON QUALITY. There's never a "wrong" time to buy quality investments, but there's also never a better time than when the market is shaky. Quite simply, during market downturns, quality investments - such as stocks of some large companies in developed markets and top-rated corporate bonds - tend to not drop as far as riskier investments.
■ LOOK FOR BUYING OPPORTUNITIES. Everybody knows that it's a good idea to buy low and sell high but many investors do just the opposite: They chase after so-called hot stocks, whose price may already be peaking, and they sell stocks whose price is falling, in an effort to cut losses.
But the best buying opportunities often occur when the market is down. That's because a market slump tends to drag down all stocks, even those with good prospects for future growth. The best buys are often those stocks whose fundamentals are strong but whose price has dropped substantially.
■ THINK LONG TERM. The recent 4.2 percent drop was big news. But as weeks turn into months, and months into years, will the impact of this drop be meaningful? The answer is: We don't know. To put some perspective on this question though, look back 20 years, to March 1987, when the Dow Jones Industrial Average stood at around 2,300. Since that time, the Dow has gone up about 420 percent - an increase that's 100 times as large as the size of last week's drop.
Of course, past performance is no guarantee of future results. But it's a fact that the stock market numbers historically have trended up. So, if you don't let short-term drops send you to the investment sidelines, your patience and perseverance may give you an opportunity to be well positioned for the long term.
No one really likes to see the stock market shed so much wealth in a short period of time. But if you concentrate on quality, look for good deals and think long term, you can navigate the sometimes-bumpy roads of the investment world and continue on your journey toward your important financial goals.
Submitted by Sarah Taylor, Edward Jones Investments,
Sarah.Taylor@edwardjones.com.
