After the Fall: What to Do Now
Hold your stocks, experts say. Some even say buy more; and consider bonds
Last Monday's dramatic market downturn punctured the illusion of endlessly rising stock values. So, what do you do now? Stay invested? Get out of the market? Shift to "safer" investments?
Each person's situation is different, so there's no simple answer. Here is a discussion of key issues.
Just how serious has the recent downturn been?
"It was a normal market correction," says Arnold Kaufman, editor of The Outlook, a financial report published by Standard & Poor's Corp. A "correction," typically means a loss of 5 to 15 percent of market valuation, often in just a few days. A more serious "bear market" means, by one definition, a loss of more than 15 percent, often over a longer period of time. As of this writing, the Standard & Poor 500 index and the Dow Jones industrial average are each down about 10 percent from their highs. The correction is most pronounced among technology stocks. The Nasdaq composite index, weighted in that sector, is down about 15 percent.
Could we be entering a "bear market?"
"The jury is out," Mr. Kaufman says. He believes the market is stabilizing. Still, some technicians worry that indexes could drop on difficult news, such as disappointing corporate earnings or an interest-rate hike later this year. Higher rates inhibit corporate profits, thus driving down stock prices. Bear markets are infrequent. But there have been 14 since World War II (see chart).
Is it safe to buy stocks again?
That depends on your risk tolerance. Some very good stocks are now much cheaper to buy, Kaufman says. "One should be very careful," says Gene Jay Seagle, president of Tactics & Technics, a market consulting firm in Weston, Conn. He likes companies with proven value.
Should I get out of the stock market?