The Markets Dropped Yesterday: What You Should Do About It

An investor reading the news this morning was likely dismayed to find reports like this from Reuters: “Wall Street fell sharply on Thursday, with the S&P 500 and the Dow Industrials suffering their worst daily percentage drops in about six weeks.” Any normal person probably focused on the phrases “fell sharply” and “suffering their worst,” in part because most of us have only a vague idea what the S&P 500 and the Dow Industrials actually are and in part because these phrases make things sound fairly tragic. In reality, what we saw yesterday was a fall of less than 1% in the value of those two indexes, which is to say, not much at all.

Putting aside the question of whether financial journalists should create excitement where none is otherwise to be found, the drop in two of our leading indexes does raise the question of whether you as an investor should be doing anything about fluctuations in the stock market. As usual the answer is “maybe.”

If you’ve been reading this blog a while, you would have seen posts like this and this suggesting that you come up with a strategy for your investing. Your strategy was meant to take into account what you plan to do with your money eventually and how you feel about risk. It also took into account the fact that your investments were going to fall, drop, slide or stagnate at times, as all investments do. To account for the latter, you created an allocation model with a target amount for each type of investment in your account (i.e. 15% bonds; 40% U.S. large company stocks; 10% international stocks, etc…). Assuming you did this, you are now free to ignore the market’s whims and fits…mostly.

After you created your allocation model, you should have settled on a regular schedule for checking on your accounts to see if they are still roughly in line with your targets. If like most self-directed investors you are thinking “oh, right, I was supposed to do that in April” the rest of this post is for you.

Keep in mind when checking on your targets that we aren’t worried about your bond holdings being at 14.5% instead of 15%. That’s probably not worth your time (and possibly, trading fees). But we probably are worried if those bonds have dropped down to 10%. That’s a different risk model and one you carefully decided against using. When you see things getting off-track like this, it’s time to sell the investments that have gone way over their marks and buy things that are well under.

If you think about it, this might well mean that you are going to react to one of those turns in the market. But your asset allocation strategy spares you any complex analysis of the Dow Industrial Index (phew!) and dictates that you sell your best-performing investments (sell high) to buy your worst performing (buy low).

So, what should you do if the financial headlines get dramatic? Ignore the panic and the celebrations, and use those headlines as a reminder that it is probably time to check your targets.