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Understanding Last Week in the Market

The work-week isn't more than a few hours old and the phone has already rang more today than it usually does in the course of a week. While I would love to believe that this is an indication that my clients miss me, there is really only one thing it can mean--the market went down.

And down it went...more than 1,000 points in three days. If you are keeping score, that is a loss of nearly 6.5% for the Dow Jones Industrial Average between August 19-21st, and a year-to-date loss of more than 8.3%. The S&P 500, a broader U.S. index, was not spared either-- falling below the psychologically important 2,000 mark. It was down 3 percent on the day and more than 7 percent below its recent peak. That is more doom and gloom than anyone really wants for a Friday afternoon, but as last week ended, that is where we were left---with the first impactful market correction that we have seen in four years.

And now, the panic sets in. Panic that we are headed for a repeat of 2008. Panic that the U.S. economy is headed dark a deep black hole, never to be the same again. Panic about the thousands, or hundreds of thousands of dollars that were "lost" during three hot and humid days in August. Well, do yourself and your blood pressure a favor. Instead of panicking and looking backwards, lets discuss what happened, what might be next, and how we, as investors should react to it.

Many economists will tell you that this was coming. After all, the value of the dollar is stronger than it has been in years and the U.S. economy, while not perfect, has been the prettiest house on a not-so-nice block for quite some time. The problem has been that for as much success as the U.S. economy has had over the past 6 years, there has not been a ton of faith that it represented the strength that it was showing. So, when you couple that with China's recent devaluation of its currency and the less than favorable outlook it helped create for other large world economies, and the continued drop of crude oil (a major world economic factor), you have a nasty recipe for fear. Fear leads to panic. Panic leads to a run and hide mentality which makes people get out of the market at what is really an inopportune time to do so for most investors.

 When sell-offs happen they operate a lot like a snowball rolling down a mountain. As momentum picks up, the ball rolls faster and faster. Last Friday was no different. The market lost 110 points in the final nine minutes that it was open for trading. Yikes! But that is what happens. The headlines hit, the fear-mongers are given more and more airtime, and BOOM...people start to sell. They even sell things where they have not made a terribly significant profit, or any profit at all, but want to make sure they avoid an even bigger loss.

The ironic and somewhat tragic part of this cycle is that it is the people who sell when stocks are on the way down who end up losing the most. Why? Because at some point, the human psyche changes from wanting to get out to knowing you need to ride it out. But for those who sold, it is too late. When you sell during a correction, the only thing you do is realize the loss which is otherwise a temporary blip on the radar screen. You ensure that whatever you have sold remains a loss for eternity with no opportunity for it to grow because, well, you don't own it anymore.  

This is exactly why advisors preach staying the course. Sure, I can show you plenty of graphics about how those who stayed in the game through the Great Recession has tripled their money. Sure, I can show you that the market, over the past six years, has hit record highs more than 100 times. Sure, I can tell you that this too shall pass, and ultimately the market will go up. But none of that is going to make you feel less anxious about what you are looking at right now.

So in times like this, here is what we have to remember. We have a plan. We work that plan. It doesn't change because market conditions change. Our planning is certainly meant to effect a longer time frame than this, or any other market correction will represent. This is not the time to make any rash decisions. It is not the time to decide things aren't working.

Remember this, savvy investors use market softness as an opportunity to purchase stocks that they believe are headed for long term success. It becomes the equivalent of a stock market garage sale, where you can get good, quality items for lower prices than you might have at other times.

Furthermore, cash becomes a better commodity in times like this. For months, we have spoken to clients about increasing their cash positions. Not necessarily because of an impending downturn, but because any time you are on a six-year ride in the right direction, coupled with knowing that an interest rate increase is on the horizon (which has a negative impact on bond values), cash becomes your friend. It provides flexibility and liquidity. It provides money you can reach if you need it, without sacrificing any investment positions. It provides the funds needed to take advantage of the softness in the market and make purchases that will turn into large gains when we head up the other side of the bell curve.

Lastly, don't panic. I know it is hard. Nobody likes losing money. But unless you sell your investments, you haven't LOST anything. The current value might be lower, the numbers may not look as pretty, your quarterly statements might show more negative numbers than any of us want, but you haven't LOST anything. If you sell when you panic, you lose. And you set yourself up for more panic and more loss.

It is not time to change things...anymore than we normally would. Stick to the plan and fasten your seat belt. This too is part of the ride to financial independence.

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 Securities offered through American Portfolios Financial Services, Inc. Member FINRA/SIPC (FINRA/SIPC). American Portfolios Financial Services, Inc. and American Portfolios Advisors, Inc. are not affiliated with any other named business entities mentioned.

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