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Investors must make sense of a sudden drop in stock market

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    Specialists John Parisi, left, and Michael Gagliano work on the floor of the New York Stock Exchange on Monday. The Dow Jones industrial average plunged more than 1,100 points Monday as stocks took their worst loss in six and a half years. (AP Photo/Richard Drew)

    RICHARD DREW / AP

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Stumble, fall or crash?

Investors may be wondering what to make of the dramatic sell-off in the stock market after months of tranquility. A slide that started early last week led to a sharp dive in markets Friday and Monday. The combined two-day drop represented a 6.3 percent decrease in the Standard & Poor's 500 index that undid the market's gains for the year.

Market professionals say there are still plenty of reasons to like stocks. But they can't say definitively that the selling is over.

So what should you do? Here are a few answers to common questions:

What just happened?

No one thing triggered this.

The markets took a marked turn downward Friday after the monthly U.S. jobs report showed that wages surged in January, representing the sharpest year-over-year gain since the recession. That stoked concerns about higher inflation because as companies raise pay, they often raise prices and that cycle can speed inflation.

The Federal Reserve is already expected to raise short-term interest rates this year with the economy growing. But inflation worries raise concerns that the Fed will increase rates at a quicker pace. Higher borrowing rates can be a challenge for corporations over time as they want to borrow money to grow and it drives investors to bonds rather than stocks.

The selling continued Monday, in what most experts are saying is just an overdue correction. Some believe automated trading also played a role as the systems that buy and sell stocks may have been triggered.

How bad was it?

Not that bad, really.

The drop only erases a few months of gains. Plus, market pros have noted that declines of 10 percent or more are common during bull markets. There hasn't been one in two years, and by many measures stocks are awfully expensive. The S&P 500 is now down 7.8 percent from its Jan. 26 record.

“(Monday's) market drop, while understandably unsettling to investors, just takes us back about two months,” said Greg McBride, chief financial analyst at Bankrate. “Market corrections are normal, no matter how nerve-wracking they are at the time.”

What should I do?

The answer can be one of the toughest parts of investing: Stay calm.

“Just hang in there, maintain a long-term perspective and resist the urge for any knee-jerk reactions,” McBride said.

People should be making their investments as part of a long-term plan, one that won't be entirely hijacked by a few days of losses. And there may even be more volatility ahead — there's no way to be sure.

Check in with your financial planner or investment firm if you are feeling uneasy. It may be a good time to look at your portfolio and make sure it has a mix of assets that you are comfortable with. You may have more of your portfolio weighted toward stocks that you realize after the market's big run-up.

Vanguard said that it counsels customers that changes to their portfolio should be made because their life circumstances, or their time horizon, have changed — not because of inflammatory headlines or “noise.”

Some people may want to take advantage of the dip to buy. Others may want to revisit their strategy. But those who want to get out of the stock market altogether should take pause, said Ken Hevert, senior vice president for retirement at Fidelity Investments.

It's easy to get out during down times but hard to get back in for a recovery. And drops of 5 percent to 10 percent are typically followed by a pretty rapid recovery period, he said, adding that current conditions are favorable for growth.



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