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Q&A: A Look at Market Behavior

Should you worry when "experts" say a crash is coming?

QuestionSome “experts” are predicting a bigger-than-ever market crash in the near future. I’m retired and probably wouldn’t have time to recover from that. Is someone in your firm watching carefully the IRAs of persons like me who can’t afford a large reduction in funds to live on?

Ric: There are always “experts” predicting a market crash. They are usually hawking a book, seminar or newsletter — or worse, some crazy investment scheme.

That said, of course there will be another market crash! They occur from time to time. Big ones are called depressions, panics and crashes; smaller ones are called corrections and bear markets. Regardless, it’s not important that prices will drop. What’s important is what happens after. And this is where those pundits always get it wrong: they ignore the “after.”

Market declines are not in the shape of the letter L — that is, prices don’t stay down forever. Instead, markets look more like a U or V — and that’s what’s important. Over time, it all looks like a W tilted upward to the right.

Yes, you can expect that prices will fall at some point — and you can expect that prices will rise thereafter. As an investor, you need to do only three things: diversify, so some of your money doesn’t fall in value when the markets decline; rebalance, so you can buy while prices are down; and maintain a long-term focus, so you are able to participate in the eventual recovery (with the understanding that past performance isn’t indicative of future results).

We help our clients with the first two. If you feel you can’t stick with the third, you need to talk to your planner for recommendations to change your investment allocation.

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