Why the stock market 'hissy fit' shouldn't prompt investor panic

Sometimes markets are inneed of a good reality check. And this is definitely one of those times, says wealth management advisor SusanLatremoille.

"We gotta know that trees don't grow to the sky, the market doesn't go up forever," saidLatremoille, who heads up the Toronto-basedLatremoilleGroup, a wealth management firm.

"When days like this come along, nobody likes it, but it is a fact of life. It is part of the investment landscape to have volatility."

It's natural to get emotional when red ink is flowing everywhere, she said. It's especially true wheninvestors have grown accustomedto a steady, calm market, and are not used to such volatility.

Do nothing

Despite all the recent turmoil, which resulted in the largest daily point drop in the stock market's history, investors should not panic.

The best course of action, really, is todo nothing,Latremoillesaid.

"The worst thing to do is to get all panicky and knee-jerk and either call your advisor and tell them to sell everything or, if you're a do-it-yourselfinvestor, to press that button that gets you out."

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The losses, she said, are strictly on paper."Until you sell," she said. "Then the loss is crystallized at that point."

Those lossesbegan Friday, with the Dow Jones industrial averagelosing 666 points, or 2.5 per cent. That turbulence continued Monday, with the Dow plungingby 1,175 points, a one-day total drop record, translating to a 4.6 per cent decrease. Combining Friday and Monday, the market had plunged by seven per cent.

Butfor a market correction to occur, stock value technically hasto drop 10 per centfrom a recent record high.

"Market correctionsare like vegetables,"Latremoillesaid."They don't always taste good, but they're good for you."

The marketdipped into correction territory earlyTuesdaywhen the Dow Jones, which is made up of 30 big companies, dropped in the morning session by 569 points. But it rallied later that day, finishing up with a gain of 567 points.

The S&P 500, an index of 505stocksissued by large companies, also rallied backTuesday, gaining 1.8 per cent after losing 4.1 per cent the day before, its largest daily plunge since August2011.

So while not a correction,it was certainly a significant adjustment, or blip. The steep drops Friday and Monday wiped out the gains the Dow and S&P 500 made since the beginning of the year.

Yet the while the point drops may appear large, the percentage change were relatively minor.

"The percentage changes were not nearly as big as the numerical values," said Diane Swonk, chief economist with audit firm Grant Thornton. "The percentagechanges in the market, although big enough, they were nothing compared to the kinds of ... moves we have in the past."

Think back to Black Monday: On Monday, Oct. 19, 1987, the market plunged nearly 23 per cent.

'Catches your eye'

"It's just that we'regetting [to] such lofty levels, a 1,000-point move means something because it catches your eye," Swonk said.

The markets have a had a great run with very little if anydownside volatility, said Greg McBride, chief financial analyst at the New York based Bankrate.com, aconsumer financial services company.

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Markets tend to undergo a correction every 12 to 18 months. The last correction was 24 months ago, meaning the market was overdue, McBride said.

"The markets are kind of throwing ahissyfit," he said.

Part of that hissyfit, he said, has to do with a reaction to higher interest rates and inflation. Last week, the Federal Reserve signalled it would continue raisinginterest rates. Meanwhile, the monthly U.S.employment report came outindicating continued wage growth and higher inflation. Both these developmentsmake investors squeamish, McBride said.

Positive for stocks in long term

The irony, he said, is that higher interest rates and inflationare all signs of a strong economy.

"The underlying economic fundamentals are better nowthanat any point in the last decade," he said. "All of which is very positive for stocks in the long term."

EricKirzner, a professor of financeat the University of Toronto'sRotmanSchool of Management, described the situation as a"nice perfect storm."

Prolonged strongmarkets combined with strong economic news, paradoxically, frightened people worried about rising interest rates and an overheated economy, he said.

The market, he said, may not remain as strong as it has been in the past, but the most recent developments arecertainly not a long-term reversal.

Yet he can understand whypeoplewho are in their60sand70s, lookingat retirement, get frightened during times like these.

"But if you getfrightened, it probablymeans you didn't have the right balanceinyouraccountsto startwith."

"The takeaway is if you had a nice balanced portfolio and if you had done the right thing a good mix of safety income and growth it shouldn't affect you to any great degree."