Unlike last week’s market dive in Toronto, today’s mayhem was worldwide: the S&P 500 closed down 4.7%, the TSX Composite was off 4.1%, other developed markets (using VEA as a proxy) were down 4.35% and emerging markets (using VWO as a proxy) were down 7% (making me wish I’d held off on writing this post and wait a few weeks before adding to my VWO holdings). The few bright spots were bonds (investors were presumably searching for shelter after the storm hit) and Canadian REITs (which has a slightly down day).
The ideal course of action would be to do nothing, provided you have a well-diversified portfolio designed to get through rough patches. The brave ones might want to rebalance if the allocations have deviated significantly from their targets. You may also want to note down your reaction to falling prices and use it as a guide in the future to tweak your asset allocation.
As equity investors we must inevitably endure ugly days and remind ourselves (ironically, Jason Zweig writes that individual investors are stoic about the market decline; it’s the “professionals” who are panicking) that the higher returns from equities come from bearing the risk of holding stocks through times such as this. It is easier said than done as it’s no fun watching your portfolio dive more than 4% in a single day. Still, as a net buyer of stocks for the foreseeable future, lower stock prices allow us to buy assets at a cheaper price. That’s the silver lining on an ugly day such as today.