You may have heard people talking about the stock market recently – and not in a good way. For those of you who don’t pay particularly close attention to the details of market or don’t really know all that much about investing, I want to share somewhat of a “beginner’s guide” to understanding what happened in the stock market last week.
What Happened Last Week?
The stock market is particularly volatile right now. On Monday, August 24, 2015, the Dow dropped over 1,000 points early in the day. This has actually never happened before. The Dow ended the day down 588 points. This is the worst one day loss since August 2011, and the worst overall drop for stocks throughout the day since 2008. At its worst point during the day, the Dow was down 6.6%, and finished down 3.8% (read more here). The market recovered slightly but gains were gone by the market close on Tuesday.
Beyond the numbers, everyone seemed to be panicking.
But the panic may be misplaced. Over the last six years (since the financial crisis) stocks have gained 200% (a bull market). This downfall over the last week has only turned into a fall of 11% of the gains. Of course, any dramatic changed seems to trigger some level of panic, but the point is that it really isn’t that bad considering the last few years – at least not yet. Time will tell if that changes (e.g., if markets continue to fall over time, then that would be more concerning).
Why is the Market so Volatile?
The Chinese Stock Market, called the Shanghai Stock Exchange, began to crash in July 2015, at which point the Chinese government tried to control it (more on that here). It was down 8.5% Monday, and by Tuesday it had lost 15% of its value.
As the Chinese market continues to be volatile, other markets are reacting and falling, as well.
How Does the Drop in the Market Affect You?
How the market affects you depends on the types of investments you have. If you have long-term investments in retirement accounts or a separate investment account and you are relatively young, then you really don’t have much to worry about. Why? Because you probably have a diversified portfolio. This means that your portfolio has lots of other things in it besides stocks, including mutual funds, ETFs, etc. (Read my post on Investing for Beginners and Asset Allocation for more on these topics.) The point of having a diversified portfolio is to minimize risk while maximizing your returns. Your diversification means that while stocks may be down, not everything is down. And even still, if your diversified portfolio has a long-term investment strategy, then even if you’re down now, you have a lot of time to bounce back before you’ll use the money (e.g. before retirement).
Now, if you’re a stock trader and actively buy and sell individual stocks, then you have more to consider. Why? Because you are investing in specific stocks that did in fact drop significantly last week. If you’re timing the market and investing in stocks in the short term, then you’ll have to decide what to do. This is not something that I do, nor is it something I talk a lot about. But the point I’m making here is that for the long-term investor (e.g.: someone investing for retirement), the drop in the market doesn’t mean you need to do anything as a reaction to last week.
A Final Note
Over the last week, the markets have been volatile and dropping primarily because of China’s market crashing. If you have a long term investment approach to your retirement portfolio (i.e. if you’re investing for retirement and not trading stocks regularly), then you don’t have to be concerned – yet. As long as you make the right decisions for your investment strategy based on your risk tolerance and time, then you should be set up to invest for the long term.
And as always, this is general information about the market at a very beginner level. I’m not providing specific financial advice and you should discuss any financial decisions you make with your financial professional. Thanks! 🙂