The headlines aren’t very comforting: A collapse in Chinese stocks has pushed the Dow Jones Industrial Average down by triple digits several times recently, even forcing Chinese regulators to halt trading. And, also recently, the International Monetary Fund (IMF) cut its 2016 global growth forecast from 3.6 percent to 3.4 percent, citing challenges such as falling commodity prices and rising interest rates in the U.S. as well as slower growth in emerging markets. China, for example, grew by only 6.9 percent in 2015, its slowest pace of economic expansion since 1990.
One might conclude that there are a host of unforeseen instabilities that will play havoc with our investments in the future. But we may be drawing the wrong conclusions. True, we can’t predict the future, but it’s important not to assume the worst when events like these occur.
First, we’ve seen similar events before. For example, last summer, in July and August, the Shanghai Composite Index fell 30 percent, sending the Dow down 11 percent. But Chinese and U.S. stocks rebounded. And while the stock market – one of 10 components of the Conference Board Leading Economic Index – is definitely a leading indicator, not all corrections signal a looming recession. Still, investors are prone to panic when corrections arise.
It’s like the first big snowstorm of the year, one analyst suggests: people forget how to drive in the snow. So how should you drive in these snowstorms? Simple: don’t panic. Look at the overall picture, speak to your advisor, ensure you have a solid plan in place and decide to stay the course but always make sure you have appropriate protection to the downside in case this turns into the snowstorm of the century.