With the Dow Jones Industrial Average down 2% the week ended June 21 and 4% on Wednesday and Thursday alone, it may be tempting to dump stocks now. Before making a hasty retreat from the market, here are six reasons to consider hold onto your stocks.
Successful market timing is difficult. Professional investors can't do it consistently, and amateurs have even less of a chance of making the right decisions about when to get in and out of the market. Also, human nature being what it is, getting out of the market in a panic tends to be easier to do than getting back in if it starts to rebound, when concerns about missing the bottom or a buying into a double dip can be hard to overcome.
Volatility is a fact of life when it comes to investing in stocks. Investors simply have to face the fact that even in the best of times short-term market moves can be sharp and unexpected. For example, in 2012, a year when the Dow Jones Industrial Average increased 7.3%, there were 44 days when it was up or down more than 1%.
For long-term investors, short-term volatility doesn't matter much. Many of the most successful investors, such as Warren Buffett, emphasize buying quality companies and holding them for years and even for decades. For such investors, daily fluctuations in stock prices don't matter and are little more than bumps in the road.
Volatility creates buying opportunities. Also, many professional investors with a long-term investment horizon view market declines as buying opportunities rather than reasons to sell.
Rising interests rates aren't as scary as they seem. One of the reasons for last week's market decline is concerns about rising interest rates, especially given comments by Ben Bernanke, Chairman of the Federal Reserve, that the Fed plans to slow its bond purchases. However, historically, rate increases have not pushed the market down. In fact, in 35 of the 63 years since 1950 10-year Treasury rates have risen, and in 28 of those years, the Dow Jones Industrial Average was up. Higher rates can be a sign of a strengthening in economic activity, which in turn can boost corporate earnings and, at the same time, spur increases in share prices.
There's no need to over-react to Bernanke's comments. He emphasized that the "tapering off" of bond purchases will be data driven and will be adjusted, if necessary, to reflect what is happening in the economy. This suggests that if economic growth falters, the Fed could stop or even reverse the pull back in purchases.
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