Traders on the NYSE floor, January 24, 2022.
Source: NYSE
Monday saw one of the wildest trading days in years, with Dow Jones Industrial Average fell about 1,100 points before recovering and ending the day slightly higher. Stocks are lower again on Tuesday.
“Should I be worried?”
That’s been the question many investors have been asking this week.
While volatility can scare off some investors, many experts say this drop is a time to get in or a time to stay in a trend.
I sat down with Kevin Simpson, founder and chief investment officer of Make a plan to get rich and the author of the new book, “Walking Towards Wealth,” for some answers.
CNBC: Why are stocks falling?
Simpson: Adjustments are a normal course of market action, but they never feel good when you’re in the middle of them.
Shares are falling on mixed corporate earnings and worries about rising interest rates.
The year is starting with ominous signs. The winds have changed. Not only will the Fed raise interest rates, they will no longer pump money into the economy. A lot of that money went into the stock market.
CNBC: The S&P 500 Index sank into a correction on Monday. Should investors be worried?
Simpson: A 10% increase in the market is not cause for concern. We’ve only become spoiled in the last few years due to the easy cash flow provided by the Fed. What’s unusual is how long the interval between edits is: 5-10% edits have happened very often, about once a year since the end of World War II.
Fortunately, the market usually recovers quickly from these slight dips.
S&P 500 down since 1946
| Refuse | # refuse | Average recovery time in months |
|---|---|---|
| 5% -10% | 84 | first |
| 10% -20% | 29 | 4 |
| 20% -40% | 9 | 14 |
| 40% + | 3 | 58 |
Source: Guggenheim
CNBC: Could we see it fall even more?
Simpson: In the short term, the key is Wednesday’s Fed commentary. The good news is that the Fed is currently in the market’s attention. Investors were convinced that the Fed would raise interest rates aggressively. So if they just said they would raise rates gradually, which would probably only have 3-4 small hikes this year, the market is likely to ease off.
CNBC: What Should Investors Do Now?
Simpson: Long-term investors should know they can’t bottom out. A 10% drop is a good entry point. The biggest mistake investors can make is using these drops as an excuse to get out of the market. I’m an active manager, but retail investors should continue to own index funds as core holdings, like Vanguard S&P 500 ETF (VOO) – and use dollar cost averaging.
It is important not to try to time the markets. I know many successful investors, I don’t know many successful traders. Retail investors tend to underperform professional investors because they let their emotions drive their investment decisions. Staying on course and looking long is always the lesson.
CNBC: What kind of returns should investors expect over the next few years?
Simpson: The S&P 500 has seen an unusually large gain in the past 12 years since the Federal Reserve started pushing interest rates down while pumping money into the economy. That is currently reversing, so it makes sense to expect returns to fall below average over the next few years.
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Investors should expect single-digit returns, not double-digit returns. That shows the importance of dividends, because 2 percent or 3 percent dividends can be very influential on those types of returns.
The important thing is income. As long as we have earnings growth, stocks can move higher even if the Fed tightens, as long as they aren’t too aggressive.
CNBC: If I’m over 60 and concerned about a steeper 10% market drop, is there anything I should do?
Simpson: If you’re over 60 and a more conservative investor, you want to be clear about how much risk you’re comfortable with. However, 60 is very young for this generation. Today’s 60-year-olds will live into their 90s and beyond, so they’ll have a long investment life after retirement. That means you have to stay in storage longer. If you are 60 years old, your time is not as short as you think.
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