If you follow the stock market closely, I hope you enjoyed last week’s roller coaster ride. We ended the week down just under 1% in the S&P 500, and almost 3% in the tech-heavy NASDAQ, as investors realized some gains in their technology stock holdings. In plain English, folks sold technology stocks. With technology stocks, specifically the so-called “Magnificent 7” making up about a third of the S&P 500 index, a rotation out of these stocks has an over-sized impact on the market as a whole.
But what should the average investor do with this information? The short answer is absolutely nothing. If you are watching your accounts every day, you probably noticed a big drop early in the week, before things mostly recovered on Friday. So if you panicked and sold out early in the week, you would have missed the recovery. For everyone who stayed invested, the S&P is up just over 1% year to date.
If you’re thinking this is all mumbo-jumbo, that’s okay. If you own an actively managed mutual fund, maybe in your 401(k) or an IRA, you’re paying for someone to actively research companies and invest on your behalf. They’re watching the market and acting accordingly. Remember, stocks aren’t priced at what is happening now; they are priced at what the market thinks will happen in the future.
If you own a passive index fund, again in your retirement accounts or TSP, you still own stock, or ownership shares, in a variety of companies. Your investments should move with the index or sector you’ve chosen. You don’t need to panic when it drops. In fact, from 1980 to 2024, over 90% of the time, there was a mid-year drop of 5% or more in the market. And even when the S&P 500 experiences a double-digit decline of 10% or more, the index has still finished the year with a positive return in 64% of those instances.[1] So almost two-thirds of the time when the stock market drops over 10%, the market fully recovers and has a positive year.
Drops in the market are normal. You can certainly take advantage of these dips, by tax-loss harvesting or investing cash. Use them to be more tax-efficient when you rebalance your portfolio. Or use professionals who are doing these things on your behalf.
Your action item this week is to check in with your financial advisor if you haven’t done so recently. An annual review helps keep your portfolio aligned with your goals.
Check out our website and Facebook page for more information and for our educational events, like our upcoming webinar tonight discussing long-term investing.
CovingtonAlsina is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
[1]https://www.google.com/search?q=how+often+is+there+a+mid+year+decline+in+the+s%26p+500+with+a+positive+yearly+return&sca_esv=55a4e0c02f0bf2c1&rlz=1C1GCEA_enUS1101US1101&biw=1440&bih=791&ei=cayIaYyvB6vU5NoPgYfGkQQ&ved=0ahUKEwjMq4TKm8qSAxUrKlkFHYGDMUIQ4dUDCBE&uact=5&oq=how+often+is+there+a+mid+year+decline+in+the+s%26p+500+with+a+positive+yearly+return&gs_lp=Egxnd3Mtd2l6LXNlcnAiUmhvdyBvZnRlbiBpcyB0aGVyZSBhIG1pZCB5ZWFyIGRlY2xpbmUgaW4gdGhlIHMmcCA1MDAgd2l0aCBhIHBvc2l0aXZlIHllYXJseSByZXR1cm5I4qMBUIYWWIigAXAUeACQAQCYAaYBoAGEHaoBBDQ3LjO4AQPIAQD4AQGYAhSgAsYLwgIKEAAYsAMY1gQYR8ICBRAAGO8FwgIIEAAYgAQYogTCAggQIRigARjDBMICChAhGKABGMMEGArCAgUQIRigAcICBRAhGKsCmAMAiAYBkAYIkgcEMTYuNKAHgX-yBwQxMi40uAe1C8IHBjAuMTMuN8gHNIAIAA&sclient=gws-wiz-serp