It was the top headline on the evening news on Feb 27. “The Dow Jones Industrials Index Declined by 416 Points” Based on the coverage of the story one would have thought that the world was coming to an end and that people should be jumping off buildings because their retirement savings were in jeopardy.
Here is why the events of Feb 27 should not be of concern:
1. If you are many years from retirement and have a good asset allocation the day-to-day gyrations of the stock market don’t really matter to you. You should be much more concerned about where the market is in 20 or 30 years than where it is today. Long-term stock market trends are much more tied to long-term economic growth.
2. If you are in retirement or close to it, your asset allocation should be such that day-to-day changes in the stock market do not affect your overall retirement portfolio significantly. For example if you are retired with 25% of your money in stock mutual funds and they decline 3% in a day, that would only be a decline of .75% for your portfolio, perhaps even less if the other assets in your portfolio increase.
So if you were worried about the stock market declines on Tuesday one of two things are happening:
A. You have an appropriate asset allocation but you let what you hear in the media worry you unnecessarily.
B. Your asset allocation is not appropriate for you time horizon and risk tolerance and you should have less of your portfolio allocated to stocks. (e.g. You are 70 have 100% of your retirement portfolio allocated to stocks, but don’t want to lose more than 10% of your portfolio in a given year).
So the next time this happens again, and the media tells you to worry. Just shut off the TV, put down the newspaper, close your web browser, and RELAX.