That inevitable market correction we’ve been waiting for

coat picture

Winter barreled into our area last week. Late Tuesday evening I found myself in the backyard fumbling to get the outdoor faucets covered and the citrus trees inside. By then the wind chill had dropped into the teens and I was thinking to myself, “I wish I would have done this a week ago when it was 70 degrees.”

image - weather

We got a similar shock from markets in October – global markets were down roughly 6% to 10% – and November is continuing that downward trend so far. Here’s what the last 2 months look like when you graph the growth of one dollar (a lot like our recent weather):

S&P until 11-21

We are not in bear territory for stocks yet, however the outlook for the rest of 2018 doesn’t look great. As of Friday, the S&P 500 and the Dow 30 indices have both turned negative for the year, while the NASDAQ remains slightly positive.

Investors naturally start to wonder what should be done with their portfolio when they see a trend like the one we’re experiencing now. To that question we recommend no action at all. The truth is, any necessary “maintenance” for your portfolio or your financial plan should have happened well before this market correction. Remember, 2017 was a great year for stocks. Here’s a few numbers to refresh your memory:

2017 returns

Rebalancing for your portfolio should have occurred in the first part of 2018, not now as the markets take some of those gains back. Regular rebalancing will capture those exceptional gains when they happen, like 2017, and prepare you for the unavoidable bad year that is likely to follow.

Rebalancing, however, is very different than making changes to your portfolio mix. We do not recommend making changes to your portfolio mix of stocks and bonds unless your personal situation has changed, whether it’s your financial situation or individual risk tolerance. If you find yourself worrying about the current market correction or your financial plan, please call us. We can discuss your plan, take a look at the portfolio, and review your options.

This is also a good time to remind yourself there is a big difference between global weather and global markets. The weather is relatively predictable – I could have easily looked at my weather app and known that freeze was coming last week. And if you give me any month of the year, I can reasonably predict the weather for your area over the following month. It’s all about the earth in relation to the sun’s energy, which is predictable.

weather cycles

Investors naturally see similar trends for stocks and think they can make predictions about the future. Unfortunately, markets are far more complex – they can be moved by human preferences, government policy, and many other factors we cannot possibly predict. In economics they say markets follow a random walk with a long-term upward trend. Yes, markets move randomly from day to day, but they tend to go up over time, rather than cycling between a high and low range like the weather.

growth of S&P

We have been in a bull market for over 9 years now. In fact, we’ve been in a bull market for the entire history of New Dimensions, which was started in 2010. Over the course of my 20-year career I’ve witnessed two deep bear markets, the Tech Bust in 2000 and the Financial Crisis in 2008, along with plenty of market corrections along the way. I’m firmly convinced both bull and bear markets cannot be predicted, but here’s the good news – we see bull markets much more often than bear markets.

Successful investing requires that you focus on the upward trend in markets while at the same time accepting and planning for the occasional decline. That’s exactly what your diversified portfolio is designed to do: use the long-term growth trend of stocks to help you reach your goals and add enough bonds to meet your near-term spending plan and dampen the volatility.

You have prepared well in advance for the next unavoidable bear market. You have a comprehensive financial plan that maps your financial future and a well-balanced portfolio designed to keep you on track. Over the next few months we may or may not witness the end of the longest bull market in US history. Regardless of when this bull market ends, and it will certainly end someday, you’ll be ready with a long-term plan.

1 All stock market data provided by Dimensional Fund Advisors (www.returnsweb.dimensional.com). Performance data shown represents past performance. Past performance is no guarantee of future results and current performance may be higher or lower than the performance shown. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. To obtain performance data current to the most recent month-end access our website at us.dimensional.com. S&P 500, MSCI EAFE & MSCI Emerging Markets are indexes that cannot be invested in directly.

Comments

  1. Surya Bommakanti says

    Timely article. Love your balanced and systematic approach. Over the course of the last couple of years (partly as a result of reading your posts), I’ve trained myself to watch the markets but not react to swings. The next few years promise to be an interesting journey!

    • says

      Surya – thanks for reading. Yes, volatility is high and we might be in this phase for awhile. This is when investors really need a long-term plan, but the short-term emotions can be so consuming.

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