The average American probably hasn't spent a lot of time contemplating the value of China's currency or the other uncertainties in that country's economy. Yet Wall Street losses since last week — including a 1,089-point plunge in the Dow Jones Industrial Average at the opening of trading on Monday — have a way of getting the public's attention.
The simple explanation for this significant fall in the stock market is mostly about China and the country's efforts to manipulate its economy, particularly given China's policy of favoring government dictates over market forces and accurate economic accounting. Investors had every reason to have doubts that a country that has provided nearly half the world's growth in recent years can't keep the boom going forever.
Add to that uncertainty falling commodity prices, especially crude oil at a six-year low, and the expectation that a bear market was overdue anyway given the record run-up in stock prices, and the stage was set for a drawback, or "correction," as analysts like to call it. The net effect is that a portfolio worth $10,000 on August 17 might be valued in the neighborhood of $9,320 today if you were fully invested in the Dow — and the drop is even bigger if you compare it to where stocks stood in mid-July when the Dow was over 18,100 points.
We won't sugarcoat a stock market decline that's approaching the double-digit range for many investors. It's never fun. But for the vast majority of Americans, here's what you should be doing about your portfolio: probably nothing at all.
While everyone has a different situation — a septuagenarian who owns stocks is not facing the same risks and rewards as someone 50 years younger — most people are exposed to the stock market through 401(k) plans or the equivalent. Such retirement savings accounts aren't meant to be managed on a day-to-day basis or even weekly or monthly. One of the worst mistakes such average investors can make is to either chase profits (put more money in the market when values are rising) or run from losses. That's called market timing, and it almost never works.
Retirement savings accounts are designed for long-term horizons. Investors who stood pat after the record Wall Street drop that began in 2007 and continued until early 2009 were richly rewarded — the Dow surpassed its 2007 valuation two years ago. Indeed, if one looks at the market since 2009, even a 10 percent drop is little more than a bump in the road as the Dow remains more than double its value from 2009 despite the August swoon.
We can't predict what the market will do next, and those individuals who don't think they can stomach the risks involved probably ought to talk to a qualified financial adviser about alternatives. (A common rule of thumb is not to put money you might need in five years in the stock market anyway.) But for most of us, there really is no choice but to ride this out: With fewer employers offering pensions, we live in an age of do-it-yourself retirement savings, and stocks play an important role in defined contribution plans, their long-term returns easily surpassing bonds and other investment choices. Ignoring them doesn't provide peace of mind, only a new worry about whether 401(k) investment returns will be sufficient to keep up with inflation.
Meanwhile, remember that sudden 1,089-point drop, the biggest single day decline in the Dow at Monday's opening bell? The market pared that down by 80 percent by mid-day, then fell again for a 588-point drop at closing. That's the roller coaster nature of stocks and the only sensible reaction to that kind of normal but frightening reality is to ignore it as much as possible. As Warren Buffet once observed, it's best to buy stocks on the assumption "they could close the market the next day and not reopen it for five years." That kind of long-term thinking is far more likely to succeed than picking winners and losers on the market or timing investments to coincide with peaks and valleys in pricing, an exercise more akin to wagering at Baltimore's Horseshoe Casino than legitimate retirement planning and investment.