The S&P 500 fell for the seventh straight day on Friday, Feb 28, 2020. The index has suffered its steepest market drop since the 2008 financial crisis driven by unsettled panic and fear that the coronavirus is going to drive the economy into a recession.
This is a classic example of a mad rush of investors all trying to move out of the markets at the same time due to unsettled emotions.
As history has taught us, the act of investors selling out of the markets all at once is always followed by a massive drop in the market. Yes, the coronavirus is obviously a legitimate concern, but as an investor, you can clearly see how emotions can drastically impact the market in short bursts.
This is why there is a 90% failure rate for the short-term oriented investor or the self-proclaimed day traders out there.
Think about it, the S&P 500 index has fallen by 12% since Feb. 19, but chances are that the actual earnings for the vast majority of the underlying 500 corporations that make up the index have not fallen by 12% since last week.
This emphasizes the power that human emotions have on short-term market fluctuations.
Investors should stay focused on the long term & not panic
Massive panics rarely benefit a company's stock, but it can present lucrative opportunities for the long-term oriented enterprising investor who remains cool and calm during turbulent conditions. This type of investor can reap the benefit of future market rallies by staying the course, or by pouncing on bargain-priced stocks caused by fearful selloffs.
For example, the hardest-hit sectors during this panic within the tourism and travel industries such as cruises, casinos, hotels and the like may very well present lucrative opportunities for a bounce back. If you look back at prior epidemics such as Brexit, 2008 financial crisis, the Greek debt crisis and so on, you will see that the individual retail investor typically gets burned in the long-term due to the inability to keep their emotions in check.
It is important to keep in mind that stocks are not merely ticker symbols that bounce around randomly on a chart. Stocks are actual ownership shares of businesses, and the well-trained investor seeks out to own well-managed businesses that provide goods and services that consumers love and adore.
Overall, the best practice is to remain calm and disciplined in adherence to your long term investment strategy.
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Disclaimer: Hudson Wealth Management, LLC (HWM) is a FINRA registered investment adviser firm. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Before investing, consider your investment objectives and HWM's fee schedule. The information provided herein is for illustrative purposes only and does not constitute personalized investment advice, recommendations or solicitations to hold, buy or sell any investment or security of any kind. All images and return figures shown are for illustrative purposes only and are not actual customer or model returns. Past performance does not guarantee future results.
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