Stock Market Stumbles
By Tom Kirk
After the very steep ascent of US stock market over the last three years (S&P 500 up over 50 percent since April 2012, before the last few days), it is giving back a small amount of these large gains.
Global economic worries, this time lead by China and its slowing rate of growth (something that has been predicted for years), are causing equity prices to be recalculated downward by the market. Maybe prices have gotten a little too high in light of what is going on.
But this kind of thing is exactly what the stock market needs. Regular and unpredictable stock market volatility is the reason that a diversified portfolio of 100% stocks has provided a long-term return of around 10%. There will always be market volatility in the equity markets, and the only way to avoid this is to put your money in the bank in exchange for the very low rate of interest they pay.
Of course, there is a place for stocks, bonds and cash in a properly diversified portfolio – cash for short-term needs, bonds for stability and stocks for long-term growth. The counter to volatility is time, so only put money in stocks that you don’t expect to need for at least five years, and longer is better.
Weeks like this aren’t easy but with a well-diversified portfolio and the appropriate allocation between cash, bonds and stocks, you can welcome this kind of short-term volatility because you know it is contributing to your long-term financial freedom.
About the Author: Thomas L. Kirk
CPA-PFS President, Founder and WealthCoachTM
- Certified Public Accountant
- Personal Financial Specialist
- Financial Planning Association Member
- University of Florida, BSBA