At last, the US stock market suffered a correction. Ahh, sigh of relief!
Last week’s 11% drop in the S&P 500 is called a correction when the market falls by more than 10%. While CV-19 ie: the Coronavirus is alarming as the number of cases increases, the recent downturn in the market is long overdue. I have been waiting.
I will share my top five takeaways and next steps for you to consider.
Last week, I was away in Mexico when I heard the news about the correction. My immediate response was a HUGE sigh of relief! I do not panic when there is a market downturn. I am confident that my clients have long-term Financial Plans in place as markets go up and down.
Takeaway #1: Breathe a sigh of relief, instead of concern, about this correction.
While a gradual decline is preferable to a sudden correction, the market is reflecting concern that CV-19 will cause a greater economic slowdown. Since factories have shut down in China, prolonged delays are disrupting global supply chains. In China, the economy is already feeling the impact of limited travel and closed schools. The world is watching what happens with CV-19.
On a positive note, Netflix stock is up 14% last week as investors believe people are staying home and will watch more streaming content.
Takeaway #2: Do you have a Financial Plan?
The people who often panic when there is a decline/correction are the ones who do not have a long-term Financial Plan. Or they are not clear what their Financial Plan is.
My clients have a clear and actionable Financial Plan. A Financial Plan includes strategy with your retirement plan, investment account, real estate purchase and perhaps college savings for your children. (If you do not have a Financial Plan, please hit REPLY and reach out to me.)
For some clients, we have been waiting for this correction to add some money from the sidelines to the market. When there are ups and downs in the market, the process of dollar-cost averaging (contributing money each month) allows you to benefit from market declines.
Takeaway #3: Stick to your Financial Plan.
This means maintaining a consistent contribution to your retirement plan (401k, 403b). This is long-term money. Some people think it makes sense to pause contributions when there is a decline in the market. Monthly contributions are beneficial during a market drop as they are a form of dollar-cost averaging in getting in at this lower level. Even Suze Orman talks about dollar-cost averaging!
If you are setting money aside for a real estate purchase, the correction is a reminder of why that money is in a conservative, liquid account. That account is then not subject to market declines.
Takeaway #4: Ask where we are in the business cycle.
We have had an extended expansion in the business cycle. With my clients, I have incorporated a potential market decline/correction in the Financial Plan.
In 2020, we have moved past the peak of the business cycle into the gradual downturn of the cycle. Unfortunately, the downturn can happen more quickly than we can anticipate, especially with an external event such as CV-19, which can accelerate an economic slowdown.
In my videos in my Wealthy Warrior Women Group, I use the reference of where we are in the business cycle and share my views of financial markets.
Takeaway #5: What is your International Allocation?
I see that the standard allocation in 2035 and later Target Date Funds is allocation of 35%+ for International Equities. I am concerned about this. I have been making adjustments to client portfolios. Please reach out to me if you have questions about your international allocation.
Overall, a market decline can be positive for the market, especially when the market has had an extended rally. As a reminder, in 2019, the S&P 500 was up 30.4% compared to the historical average of 8%. I still find that number jaw-dropping.
As of Feb. 15, 2020, the S&P 500 was up another 15%. (!) This dizzying pace is unsustainable. Although February’s market decline of 10% was the worst month since 2009, the S&P 500 needed a breather!
Your Financial Plan
If you are contributing to your monthly retirement plan, like the majority of the US population, then you can get excited you will benefit from investing your next monthly contribution at a potentially lower market level.
When you have a Financial Plan, market ups and downs are part of the investment process.
When financial markets have dramatic moves, stay calm and stick to your Financial Plan.
Are you still feeling nervous about your financial future? Connect with me here!
Kelly Gushue is Founder & CEO of www.PersonalFinanceWarrior.com. She empowers women all over the world to invest & take action on managing their personal finances through her online courses, coaching & speaking events.
Kelly has worked in several areas of finance including Portfolio Construction, Investment Management & Investment Research. She holds an AB from Harvard College & an MBA from the Booth School of Business at The University of Chicago.
Follow her entrepreneurial path on Instagram @PersonalFinanceWarrior!
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