Should you be concerned about the recent market selloff?
While the concept of a "healthy" market correction may sound heretical to some – and no one enjoys seeing their account balance drop - there are circumstances in which a drawdown may be both necessary and helpful to the market's general wellbeing. So how recent market downturn can be healthy? Let's take a closer look.
A good selloff is one that reduces excessively optimistic moods without jeopardizing the underlying market trend. Irrational investor optimism promotes speculation, overextension, and bubbles that eventually burst. The infrequent downturn can help drain out some of the market's shorter-term speculation by letting the air out of any bubbles before they get too tight. Consider it a controlled burn to avert a greater wildfire — short-term discomfort for long-term gain.
Moreover, changing expectations and sentiment to better represent reality is beneficial, even if it necessitates price reductions. “Bull markets are born on pessimism, grown on skepticism, mature on optimism, and expire on euphoria,” famous investor John Templeton once remarked. A few corrections here and there are essential for containing the enthusiasm and keeping stock values related to their fundamentals.
This is essential since stock prices may be both volatile and unpredictable, resulting in short-term changes that aren't consistent with a company's or economy's underlying long-term outlook. We can analyze any selling pressure by asking the following question:
Is there a shift in the big-picture economic story?
Is there a new set of significant risks in the market that haven't been appropriately accounted for?
Has the firm's earnings outlook changed significantly?
Answering these questions can get to the heart of the debate: a healthy, sentiment-driven selloff versus the start of something more serious.
Of course, trying to time a market peak, regardless of the form of the subsequent selloff, is a tough game. Markets are prone to volatility, and high volatility is simply the cost of entry for the market's long-term profits. Consider big swings as a feature of the market, not a problem, as long as humans are involved, of course.
Whether we consider a market downturn to be "healthy" or not, selloffs are frightening events. And a dwindling 401(k) balance in the midst of a constant stream of scary headlines can make good decision-making difficult. That is why, in times of uncertainty, we recommend contacting a PG Capital Advisor. Our solid financial plans are designed for success in all market situations, including the occasional healthy downturn. And for the long-term investor, these “market reset” periods can be embraced as a healthy stop on the path to achieving greater financial objectives.
The material on this page reflects PG Capital's professional opinions as of today and is subject to change. The information presented here has not taken into account any particular investor's investing goals or needs, and investors should not base their investment decisions entirely on this material. Past performance is not a guarantee of future results. All investments involve some amount of risk, and investors have different time horizons, goals, and risk tolerances, so consult with your PG Capital Financial Advisor before proceeding.