While Monday’s equity price decline was rapid and significant, it was far from historic in terms of Dow Jones single-day percentage losses, and investors should beware of media coverage that over dramatizes it, says a Virginia Tech expert.
“The Dow fell 4.6 percent. Undoubtedly, this is a large decrease in value. However, it pales in comparison to the 22 percent decrease that occurred on “Black Monday,” October 29, 1987,” said Brad Paye, an assistant professor of finance, whose research interests center on asset pricing and interactions between financial markets and macroeconomic conditions.
Paye says market volatility, a measure of the amplitude of price fluctuations, is likely to be high over the coming weeks. “Expect a bumpy ride for the short- to medium-term,” he said.
Does this mean an investor should reduce exposure to equity and reallocate toward less risky assets?
This depends upon several factors, including one’s investment horizon (longer horizon investors should be less concerned) and an investor’s risk aversion, or inherent willingness to bear risk, Paye says.
Unsure investors would be wise to contact a certified financial planner (CFP) or other financial advisor to diagnose their appetite for risk and discuss whether a significant portfolio adjustment is sensible, he noted.
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