Hey Millennials: Should Market Drops Be Something to Fear?

Markets go up, the markets go down, but historically the stock market has trended up. For young investors who may have never seen a sizable market drop, recent volatility may provide a valuable lesson.

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https://tickertapecdn.tdameritrade.com/assets/images/pages/md/Don't panic: For Millennials, Market drops can be buying opportunities
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Yes, Virginia (and Vincent), the stock markets go down too. Or as legendary banker J. Pierpont Morgan is credited to have said, “The market will go up and the market will go down, but not necessarily in that order.”

What does that mean during the topsy-turvy capriciousness that has rocked the markets this month? If you’re a younger investor, who might have never seen a market correction, the answer for some may be, “don’t worry too much.”

In fact, according to some analysts, market downturns could be a good thing, as potential opportunities might be popping up. “A silver lining in all of this is that sharp and swift sell-offs have traditionally led to quick conclusions and rapid recoveries,” said Sam Stovall, chief investment analyst at CFRA Research. 

The Coiled Spring Effect?

For investors who have never known a market collapse—yes, Millennials, we’re talking to you—this freefall looks more violent than other crashes of the last 50 years, but it’s not more violent, and not too unusual, according to Thomas Farley, president of the New York Stock Exchange (see sidebar right). If you were listening to any of the hundreds of analysts pontificating throughout much of last year and into this one, stocks were looking overvalued. A correction was coming, they said.

What happened is that it took so long, and that during that hold up, values on many stocks kept rising. When that happens, complacency, and even overconfidence, can set in. Some analysts liken it to a spring that becomes coiled tighter and tighter such that, when it's released, it does so quite forcefully.

Millennials might be among the last ones to be worrying about what this correction—we’re not technically in bear-market territory here—might do to their retirement portfolios. Younger investors are still in the wealth-accumulation phase. Those in their 70s and 80s, well, that’s a different story. If you're in or nearing retirement, this correction might be a reminder to review your portfolio to see if it still matches your time horizon and risk tolerance.

While last week's market moves were large in terms of magnitude, it's the percentage swings that may matter most. As Stovall noted, markets tend to go back up. “If Friday was the ultimate bottom, which is impossible to know for sure, history says (but does not guarantee) that the three S&P 500 sectors and 12 S&P 500 sub-industries that fell the furthest during this decline present an attractive opportunity for the possible bounce ahead,” Stovall said Monday. 

Volatility Points to Ponder

It’s true, it’s a lot more fun watching your portfolio grow than it is to see it shrink. But keep these points in mind as the markets wiggle and waggle their way through this gremlin of a market:

  • Don’t panic. There may be better places than the markets to show emotion. Try not to love a stock too much; it won’t hurt you when it tanks. “Buy low, sell high” may be a better mantra than "follow the herd."
  • All may still be well. The economic fundamentals appear as sound today as they were a week ago, a month ago, a quarter ago, Stovall said. Companies are still mostly reporting strong earnings results, interest rates are still at historic lows and jobs appear to be aplenty, for most.
  • Look for potential buying opportunities. Warren Buffett famously said in his 2004 letter to shareholders of Berkshire Hathaway (BRK): “Be fearful when others are greedy and greedy only when others are fearful.” In his 2016 letter, he talked, what looks like presciently, about how the years ahead “will occasionally deliver major market declines—even panics—that will affect virtually all stocks.” Hang tight, he said. “First, widespread fear is your friend as an investor, because it serves up bargain purchases. Second, personal fear is your enemy.’’ 
  • Keep an eye out for insider buying and stock repurchases. Some analysts watch what the insiders are doing and use the information as a signal. Company buybacks, and large purchases by company executives can sometimes signal commitment, and reassurance that the insiders believe in the future of the company.

One final consideration: Investing for the long-term is a marathon, not a sprint. Sometimes the road is straight and flat; sometimes it's curvy with a cliff in view. But remember, too, that past performance is only that, and not a guarantee of what’s ahead.

All investing involves risk including the possible loss of principal. 

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