Just when we were all getting used to a nice upward trend in the stock market, we're sharply reminded of how volatile it can be. Who will soon forget the stomach-churning freefall of nearly 1,000 points Thursday afternoon?
As I've mentioned before in this blog, the stock market seems to be providing the quicker path to wealth since the recession,when compared to the housing market. But oh, how that theory was tested this past week.
So maybe Thursday's market rout was a technical glitch, coupled with the European debt crisis -- specifically Greece -- but the $60,000 question remains: Now what?
"We've got clients calling saying 'what in the heck is going on?'"says Maris Ogg, Chartered Financial Analyst and president of Tower Bridge Advisors in Pennsylvania. "They're thinking this isn't investing, this is a casino."
An investment professional for more than 30 years, Ogg says that the market decline of 2008 is so fresh in investors' memories that the volatility we've seen lately is making them more than just a little nervous, despite the past year's market gains.
The bottom line, according to Ogg, is that the stock market is not heading for a sustained tumble, but we can expect volatility to continue. Her clients who are near retirement or already in retirement and seek wealth preservation already have a portfolio invested for that purpose, and are less affected by the market's swings. Those who are younger and more aggressive with risk are taking this latest drop in stride, and looking for buying opportunities. Ogg says she recommends to clients who are investing for the long term that they convert some of their fully-valued stocks into cash so they can buy into the down markets.
"Greece isn't big enough to derail the global developing economy," Ogg says, but we are in for more volatility because risks are higher now than they were three or four years ago for two reasons:
- The emerging economies (China, India, Brazil) make up roughly 30 percent of the global GDP and are inherently volatile nations.
- The U.S., and to some degree other developing nations, have a much riskier fiscal position than ever before, Ogg says. They have higher debt levels and riskier balance sheets, which means they don't have the financial strength they did in the past.
Still, Ogg points to positive signs in the U.S. economy. Financial institutions are in stronger shape than they were three years ago, there's more liquidity, and consumer debt has dropped. "We're in an economic recovery now. This isn't the time to get out of the market entirely."
So what about you: Do you plan to stay in the stock market, or have you had enough?