Am I safe? That's the question many Americans asked Monday amid a wild roller coaster ride on the stock market. The answer may still be at least a few days off.
The Dow Jones industrial average was off more than 1,000 points at Monday's open, an eerie reminder of 2008's near-meltdown of financial markets that also began in the dog days of August. By midday, however, the Dow was off just 112 points, before sliding in the final hour to close down 588.47 points to 15,871.28.
Monday's opening plunge followed a lit fuse that began in Asia, where China's Shanghai composite index finished off 8.5 percent. European exchanges followed with London's FTSE down 4.67 percent and Germany's DAX off 4.7 percent.
Ordinary investors may wonder about how much damage the rocky market might do to their 401(k). It's impossible to know what will happen next, but fund managers and financial advisers say it's generally a good time to find out where you stand and make sure you're sticking to your long-term investing plans.
If you've strayed from your original plan, it might make sense to rebalance your portfolio. Here's what you need to know:
Q: Was China the sole reason for Monday's plunge?
A: The economic slowdown in the world's second largest economy and worries about a lack of transparency in Chinese decisionmaking are drivers of the global rout. But they are not the only reasons for what now has been more than a week of sudden global volatility.
Stock prices generally reflect expectations about the performance of the economy several months ahead. Worries about the global economy more broadly, and how that might affect the U.S. economy, have been a big part of the U.S. volatility.
Large developing nations such as Brazil are struggling to grow, and in an interconnected world their problems eventually feed into international companies that manufacture there for the local market or export there from the United States. That hurts the bottom line of companies such as Germany's Siemens or the U.S. giant Caterpillar.
The earnings season hasn't produced the most profitable picture of U.S. companies, adding to international pressures.
Q: What is a correction? Should I be worried?
A: A correction is the technical term for what happens when stock markets fall at least 10 percent below a recent high. A bear market is what happens when stocks are at least 20 percent below that peak. The Dow reached correction levels on Friday and the Standard & Poor's 500 index entered correction territory Monday. These moments are fairly common: On average, U.S. stock markets have a 10 percent correction about every 20 months, as investment columnist Barry Ritholtz recently pointed out.
And not all corrections lead to bear markets, says Michael Mussio, managing director of FBB Capital Partners in Bethesda, Md. If anything, markets have been unusually calm over the past couple of years, he says. That can mean that when corrections do take place, they may happen more suddenly than in the past, Mussio says. The steepness of a market drop is not necessarily a sign of how long the decline will last, he says. "Investors shouldn't let that send them into a panic," he says.
Q: What should I be doing?
A: It's a good time to look at your portfolio to see where you are invested, advisers say. But don't make any changes that would take you away from your long-term plan. Know how much of your portfolio is invested in stocks vs. bonds. Because stock markets have been climbing higher for six years, some people might have more money in stocks than they intended to, says John Hailer, chief executive of Natixis Global Asset Management. You should also find out how much of your portfolio is invested in U.S. equities, compared to stocks from emerging markets and Europe.
Q: Does this mean I should be selling stocks?
A: If you find out your portfolio is out of whack, it can be a good time to come back to your long-term investing plans. For instance, if you're nearing retirement and were planning to invest no more than 60 percent of your portfolio in stocks by this age, but find your exposure is now closer to 70 percent, it's OK to scale back to your original goals. "You need to have portfolios matching up with your time horizon and your risk," Hailer says.
But don't rethink your entire plan because of today's volatility. And if you're still decades away from retirement or won't need the money for a while, you can afford to keep the majority of your portfolio in stocks because you have time to recover any short-term losses. Keep in mind that people who cut their stock market exposure during the downturn in 2008 would have missed out on more than six years of gains.
Q: Is it time to dump Chinese stocks?
A: U.S. investors were spooked by a sell-off in China that the media there is dubbing "Black Monday." The turmoil was sparked by growing concerns about a slowdown in the economy, so it might not be a great time to be upping your exposure to emerging market stocks, which are heavily influenced by what happens in China, Mussio says. Stick to the allocation you had originally aimed for, and if you're not sure about where to invest, it might be better to stay closer to home, Hailer says. "The U.S. market is a great place to be," Hailer says. "It's holding up better than most global markets."
Includes reporting by Jonnelle Marte of the Washington Post.
