Show #382 Airing Sunday, 4/8/07
In February, we had the largest one-day drop in the stock market in years. Most of us think that a major “correction” is terrible. But believe it or not, there are reasons why you should feel upbeat about a downturn. Here to explain is our always upbeat financial quarterback, Jim Lineweaver. Jim is the founder of the Lineweaver Financial Group.
Question: The market correction at the end of February really shook a lot of people up. What happened?
Answer: On February 27, we saw the stock market have its largest one-day drop in the past four years. The Dow Jones Industrial Average dropped by over 416 points, and at one point it appeared that it had dropped by 178 points in one minute. This appearance was in fact due to a computer error that was not accurately reflecting actual prices. When the error was fixed, it reflected a drop of 178 points in one minute. (Source BTN Research)
The S&P 500 had its largest single-day percentage drop in 47 months. The decline ranks as the 31st largest one-day drop since 1950. Of the 500 stocks in the S&P 500, all but two saw their price drop that day. (Source BTN Research)
Since then, the market has dropped even further, with some occasional daily increases. However, there is good news with this type of market. First, it serves as a very good form of reality check. It helps to remind investors that there are risks associated with investments tied to the stock market.
Question: How did investors react to this market "correction"?
Answer: When we have periods of steady growth in the market, people feel that nothing could go wrong with their investments in the stock market. The market is going up and will continue to go up forever.
When we have a day like February 27, people start asking asking "What went wrong?" Actually nothing did go wrong. The market has appreciated handsomely over the past four years, and you should expect a correction like this.
Question: Is there a bear market coming?
Answer: Yes, without a doubt. We just don't know when! We do know it will happen, and we should anticipate it. If you are going to be in the stock market, you need to understand the rewards and the risks involved. Do not just look at the potential rewards.
A market correction like we just saw is good news from my standpoint; it helps to bring people back to reality and gives them a taste of the risks involved.
Question: Are you trying to tell me that the market decline was a good thing?
Answer: Yes, and it's good news for a second reason as well. I like sales, and I try and avoid paying full price for anything in my life. Well, after a market decline or correction, the market is on sale. Look at it as a buying opportunity.
You have heard me say on the show many times, fear and greed can ruin your financial future. Well, here's a little different spins on things, and this quote comes from that savvy long term investor, Warren Buffett. "Be greedy when others are fearful and fearful when others are greedy." When people are saying, "Nothing can go wrong," be cautious. And when they are lamenting, "What happened?" look to buy into the market.
If the 416-point drop in the Dow did scare you, maybe you could use a financial check up. Now is a great time, don't wait. Procrastination now could be very costly.
You heard Jim: A bad market doesn't have to put a crimp in your retirement budget. For more information, or for a "reality check" portfolio review, call the Lineweaver Financial Group. The number's next.
