Peter Lynch, one of the most successful investors of all me, said it best:
“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
1. Corrections Happen
A “correction” is defined as a drop of 10% or more in
the value of an index. The table below provides some context around the frequency and severity of corrections in the S&P 500 from 1900 through 2017.
These numbers are very scary and real, however consider three important facts:
1.Corrections Happen: Market pullbacks greater than 10% are not only common, they average out to be an annual event.
2.They Don’t Last: Paper losses averaged less than a year and highlight the danger of selling into panic.
3.Big Drops are Rare: The S&P 500 does not fall more than 20% all that often. In addition to the data above, the index has only seen five drops greater than 30% since 1950, or roughly once every 13 years(1).
4.If you’re approaching retirement or already retired, it’s more important to avoid these major market losses vs achieving gains. How will your portfolio perform if the market drops 30%?
2. The Stock Market is an Enigma
A person or thing that is mysterious, puzzling, or difficult to understand
Market pundits are obsessed with understanding the short-term movements in equity markets. They want to explain why stock prices are rising and falling every moment of the day because those who can provide more color (another word for “insight” on Wall Street) are regarded as having a good “feel for the market.”
However, stock exchanges do not require participants to explain why they buy or sell stocks, and large asset managers even go out of their way to maintain anonymity by trading in “dark pools,” which are special venues where nobody knows who is on the other side of a trade and activity is kept secret.
Instead, market commentary comes from a mix of sources that are frequently unreliable, such as large trading rms on Wall Street that execute big orders for their clients. These traders move millions of shares every day, which allows them to see the flows up close and personal. The problem is that since most of the trading is electronic these days, their insight only explains the tiny fraction of the overall volume.
Rather than admitting that they do not know why stocks have risen or fallen, a commentator’s only option is to concoct an explanation that seems logical and well- informed but is nothing more than a guess. That way, they remain the market guru and none the wiser. With all that being said, wouldn’t you want information on helping to keep your current savings and/or investment plan sufficient to achieve retirement or maintain your lifestyle in retirement????
2.5 Tune Out the Noise
How many of you have some sort of smart device on you right now?
-From phones and watches to TVs in elevators and at gas pumps; it’s hard to escape the 24/7 news cycle.
-And that means it’s easier than ever to get caught up in the buzz of the headlines.
-You’ve heard it before: One minute the economy is great and the next minute it’s doom and gloom.
-One thing is true though: As you save for retirement, you’ll see many market ups and downs. That’s natural.
-And that brings us to the 2.5 realities equity investors must consider: Tune out the noise.
THE BOTTOM LINE is that the real danger that exists right now in markets is not the volatility, but rather when volatility returns, how it will cause investors to react. Buy and Hold is not a strategy unless you have 20 or more years to invest. Buy and Hope is not a strategy when you think the markets will always come back. Keep emotions in check and work with an advisor that has your best interests at heart.
Until Next Time…
P.S. Here is another very relevant article for you How To Understand Why Active Investing Matters