What History Tells Us About Market Corrections
Last year was the type of year investors dream of. Both the Dow Jones Industrial Average and broad-based S&P 500 crushed the long-term historic annual returns without a single notable downtrend.
This year has been a different story. Volatility is back and we have already seen market corrections. The good news is that corrections (defined as a 10% or more decline), bear markets (an extended 20% or more decline) and other challenging patches haven’t lasted forever. Take a look at the chart below and you may be somewhat surprised.
The Dow Jones Industrial Average has typically dipped at least 10% about once a year, and 20% or more about every 3.75 years, according to data from 1900 to 2017. While past results are not predictive of future results, each downturn has been followed by a recovery and a new market high.
You wouldn’t be human if you didn’t fear loss. However, Time In The Market, NOT Market Timing is what works historically. No one can accurately predict short-term market moves, and investors who sit on the sidelines risk losing out on periods of meaningful price appreciation that follow market downturns. Even missing out on just a few trading days can have a negative impact. As you can see in the next chart, your returns can be impacted by missing just a few days.
Emotional reactions to market events are perfectly normal. Investors should expect to feel nervous when markets decline. However, how you handle your portfolio’s during these periods can make the difference between investment success and failure.
We practice diversification. A diversified portfolio doesn’t guarantee profits or provide assurances that investments won’t decline in value, but it can lower risk. Overall returns won’t reach the highest highs of any single investment – but they won’t hit the lowest lows either.
When stocks are falling, it’s important to maintain a long-term perspective. Although stocks rise and fall in the short term, they’ve tended to reward investors over longer periods of time. Is it reasonable to expect 15-20% returns every year? Of course not. And if stocks have moved lower in recent weeks, you shouldn’t expect that to be the start of a long-term trend either. When stocks are falling, it’s important to maintain a long-term perspective. Although stocks rise and fall in the short term, they’ve tended to reward investors over longer periods of time.
As you can see by my statements above, volatility is common and is a part of investing. Investors have been rewarded for it if handled correctly. If you have any questions about your risk tolerance or diversification, please give us a call. We would be happy to review it for you.
Stay tuned for our next blog which will discuss "Using Fear To Sell" and how some firms use market corrections and volatility to sell you something you don't need or want. You have heard the commercials that use Fear To Sell but may not realize their techniques or recognize them. We will explain soon!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.