Three months' worth of gains gone in less than a week...
On October 10, U.S. stocks saw their largest drop since February. This came on the heels of four consecutive down days, wiping out the hard-earned gains the S&P 500 had made over the last three months.
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It's amazing how quickly profits can vanish. One day you're sitting on some tidy unrealized gains and the next you're in the red. Pretty soon your fight-or-flight instincts kick in and you begin making decisions emotionally. You get a pit in your stomach. Your judgment becomes cloudy. And all you focus on is the losses.
This is how the market looks when you're emotions are running high...
You're laser-focused on the losses. And rightfully so -- nobody wants to lose their hard-earned money. But keep in mind that the pain of loss is stronger than the joy of gain (a phenomenon known as loss aversion).
So before you do anything hasty, take a walk, take a deep breath and clear your mind. Take a step back and look at the bigger picture.
Here's what that bigger picture looks like...
In the view from 20,000 feet, we can see that the market is only 4.1% off its most recent high -- yet up roughly 200% over the last 10 years. The broader economy is chugging along with real GDP hitting 4.2% during the second quarter. The unemployment rate dropped to 3.7%, the lowest reading since 1969. Consumer confidence is at an 18-year high, according to a recent survey by the Conference Board, and small business optimism recently hit a 45-year high.
Yes, the recent market selloff shook investor confidence. But remember, selloffs are just as much a part of investing as Tuesday's 548-point explosion in the S&P 500. The recent selloff stemmed from a number of factors. The ongoing trade war with China, slower growth prospects among companies reporting quarterly earnings, the Federal Reserve increasing interest rates. And then there is the likelihood of investors taking profits after the market reached new all-time highs in late September.
Could this be the start of a bear market? Maybe. Nobody knows for sure. But here's what we do know. Historically, the last quarter of the year has always been the strongest. Over the last 10 years the S&P 500 has averaged a 1.1% return over the last quarter (this includes the 16.9% drop for the month of October in 2008). Here's how that stacks up to the other quarters.
Furthermore, over the last 15 years the month of October has ended negative only five times, while November and December have ended down only four times each. You can see how the S&P 500 has performed each month over the last 15 years in the chart below:
The bottom line is that when market turmoil hits, it creates panic. Don't panic. Look at the bigger picture.
Go through your portfolio to see if any stocks have hit their stop-losses. If one or two of your holdings had a really bad day, go back through your investment thesis. See if the reason you originally bought the stock still holds true. If it does, then maybe it's an opportunity to add to your position. Stay objective.
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It's been a tough start to the fourth quarter, but if history is any guide, there's a good chance that the fourth quarter will still end on a positive note. My Top Stock Advisor subscribers and I will be prepared either way.
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