Keeping This Correction in Perspective

After 20 months of relative calm, this volatility needs to be taken in stride.

Money On Tap

Are you upset by what is happening on Wall Street? It may help to see this pullback within a big-picture context. Corrections have become so rare as of late that when one occurs, emotion threatens to influence investment decisions.

So far, February has been a rough month for equities. At the close on February 8, the Dow Jones Industrial Average was officially in correction territory after a slide occurred, which included two 1,000-point descents within four days. Additionally, nearly every U.S. equity index had lost 7% or more in the past five trading sessions.1,2

This drop is troubling, yes – but not as unsettling as it may first seem. The market has been up for so long that it is easy to dismiss the reality of its occasional downs. Last year’s quiet trading climate could legitimately be characterized as “abnormal.”

Prior to this current retreat, the S&P 500 had not fallen 5% from a peak since June 2016. It went more than 400 trading days without such a slump, setting a record. In this same calm stretch, the index also went through its longest period without a dip of 3% or more.3

During a typical year, there are five trading days when equities descend at least 2%, plus one correction of about 14%. On average, equities take roughly a 30% fall every five years.4

This year, the kind of volatility normally seen in the market has returned. It may feel like a shock after so much smooth sailing, but it is the norm – and while the Dow’s recent daily losses are numerically unprecedented, they are also proportionate with the level of the index.

A few things are worth remembering at this juncture. One, Wall Street has had more good years than bad ones, as any casual glance at its history will reveal. This year may turn out well. Two, something similar happened in the mid-1990s – a long, easygoing bull run was suddenly disrupted by major volatility. That bull market kept going, though – it lasted four more years, and the S&P 500 doubled along the way. Three, this market needed to cool off; in the minds of many analysts, valuations had become too expensive. Four, the economy is in excellent shape. Five, earnings are living up to expectations. Last week, Thomson Reuters noted that 78% of the S&P firms that had reported this earnings season had topped profit forecasts.1,3

Wall Street may be turbulent, but you can stay calm. You could even look at this as a buying opportunity. Assuming this is a correction and nothing more, the market may regain its footing more quickly than we think. Typically, the average correction lasts less than 90 days. Consider any moves carefully – and talk with a financial professional if you have concerns or anxieties about this volatile episode for the markets.5

Citations.
1 – cnbc.com/2018/02/08/us-stock-futures-dow-data-earnings-fed-speeches-market-sell-off-and-politics-on-the-agenda.html [2/8/18]
2 – markets.wsj.com/us [2/8/18]
3 – money.cnn.com/2018/01/22/investing/stock-market-today-extreme-calm-pullback/index.html [1/22/18]
4 – marketwatch.com/story/panicked-about-a-stock-market-crash-what-you-need-to-remember-can-fit-on-a-single-notecard-2018-02-08 [2/8/18]
5 – cnbc.com/2018/02/07/the-quicker-the-sell-off-the-faster-we-recover-says-market-watcher.html [2/7/18]

When Will the Business Cycle Peak?

Fear Must Not Inhibit a Financial Strategy

Fear Must Not Inhibit a Financial Strategy

Too often, it persuades investors to make questionable moves.

 

By Money On Tap

 

Fear affects investors in two distinct ways. Every so often, a bulletin, headline, or sustained economic or market trend will scare them and make them question their investing approach. If they overreact to it, they may sell low now and buy high later – or in the worst-case scenario, they derail their whole investing and retirement planning strategy.

  

Besides the fear of potential market shocks, there is also another fear worth noting – the fear of being too involved in the market. People with this worry are often superb savers, but reluctant investors. They amass large bank accounts, yet their aversion to investing in equities may hurt them in the long run.

 

Impulsive investment decisions tend to carry a cost. People who jump in and out of investment sectors or classes tend to pay a price for it. A statistic hints at how much: across the 20 years ending on December 31, 2015, the S&P 500 returned an average of 8.91% per year, but the average equity investor’s portfolio returned just 4.67% annually. Fixed-income investors also failed to beat a key benchmark: in this same period, the Barclays Aggregate Bond Index advanced an average of 5.34% a year, but the average fixed-income investor realized an annual return of only 0.51%.1

 

This data was compiled by DALBAR, a highly respected investment research firm, which has studied the behavior of individual investors since the mid-1980s. The numbers partly reflect the behavior of the typical individual investor who loses patience and tries to time the market. A hypothetical “average” investor who merely bought and held, with an equity or fixed-income portfolio merely copying the components of the above benchmarks, would have been better off across those 20 years. In monetary terms, the sustained difference in performance could have meant a difference of hundreds of thousands of dollars in earnings for an investor across a lifetime, given compounding.1

 

Other people are held back by their anxiety about investing. They become great savers, steadily building six-figure cash positions in enormous savings or checking accounts – but they never sufficiently invest their money.

 

That confusion comes with a severe potential downside. Just how much interest are their deposit accounts earning? Right now, almost nothing. If they invested more of the money they were saving into equities – or some kind of investment vehicle with the potential to outrun inflation – those invested dollars could grow and compound over time to a degree that idle cash does not.

 

A large emergency fund is a great thing to have, but it can be argued that a tax-advantaged retirement fund of invested dollars is a better thing to have. After all, who retires on cash savings alone? Tomorrow’s retirees will live mainly on the earnings generated from the investment of the dollars they have saved over the decades. Seen one way, a focus on cash is financially nearsighted; it ignores the possibility that even greater abundance may be realized through its sustained investment.

 

Fear dissuades some people from sticking with a long-term financial strategy and discourages other people from developing one. Patience and knowledge can help investors contend with the fears that may risk hurting their retirement saving prospects.

Citations.

1 – zacksim.com/heres-investors-underperform-market/ [5/22/17]