Breathe... These things happen.

Markets go up and down, although we may have forgotten about that over the past year. They can also be volatile - something else we may have forgotten. In fact, the VIX, known as the volatility index, is experiencing its biggest spike in nearly 6 months. Our own Anxiety Index, which measures internet search around fear based terms, is whistling like a tea kettle for the first time in months. It's a good old-fashioned selloff, and it is least for now.

Keep these things in perspective if you find yourself watching the tape or refreshing your watchlist all day long:

  • Until yesterday, the market had not traded outside a 0.5% range in 99 days. That's a record.
  • The S&P 500 is up 26% in the past year despite many catalysts, real or hypothetical, to bring it down.
  • The S&P 500 hit new highs 12 out of the 16 trading days of the year, so far.  That's a record.
  • Selloffs happen. You have to be able to stomach the draw-downs if you want to keep dancing.

As an investor, you have to ask yourself, 'What's the worst thing that can happen?" Don't let your mind play tricks on you. Be reasonable. When I need a dose of reason, I like to read The Irrelevant Investor blog, by the very reasonable Michael Batnick of Ritholtz Weath Management. He reminds us that even if we entered into a bear market, or a drop of 20% from market highs, we'd be right back where we were a year ago when investors' political fears about President Trump's economic agenda caused a brief selloff. A 36% decline would certainly rattle our cages, but it would only take us back to where we were two years ago. A 50% decline might rip our faces off - figuratively - but it would take us back to 2013 levels when we broke out of a sideways market into an unprecedented rally.

Michael's illustrative chart puts things in perspective:

If you are looking for reasons why we are seeing red this week, there are plenty to fit the narrative. Interest rates are rising - no surprise there. Valuations are steep, but that's what tends to happen when the markets have been on an absolute tear through 2017 and the first 3 weeks of this year. There is political uncertainty - we've definitely seen that before, and not just in the past year. Earnings expectations are popping - see reason #2. As Liz Ann Sonders from Schwab points out, earnings expectations for the S&P 500 for 2018 have surged from a 12% expected rise to 18% in the past few weeks thanks to tax reform. That's contributed to a so called FOMO mentality - Fear of Missing out. Money rushed into the markets and we may have gotten ahead of ourselves.

You get it. We've come such a long way in such a rosy market that the shock and awe of a selloff is an unfamiliar and nasty taste. Like a shot of bad bourbon, it makes you shudder and make weird faces. That's OK, too. We need to remember that feeling because the truth is that markets do these things. One strategy doesn't work forever, although a raging bull market might lead you to believe it does. There are no secrets or magic stock gurus who have all or some of the answers, despite some of the ads you might see on investing sites. We may have a few of those too, but we know you are smarter than that.

All you can do is stay in the game, diversify like its your job, manage your risk, and don't fall in love with this, or any other rally like it. It's been a good one and it may still have legs, but you owe it to yourself and those who depend on you to keep your head and stay smart.

Caleb Silver - Editor in Chief

Want to learn how to invest?

Get a free 10 week email series that will teach you how to start investing.

Delivered twice a week, straight to your inbox.