Thinkpiece

10 Mar Thinkpiece

In this update:

• Market corrections – what are they and what should I do about them?

When one is invested into the world’s stock markets, a common emotion isn’t the anticipation of a forthcoming market crash, rather it’s the fear of one.

When headlines turn red, our natural human instinct could be to protect what we have by selling our investments.

However, history shows us that market volatility isn’t a sign that the system is breaking – it is simply the price of admission.

Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.

Peter Lynch

To help you stay the course, I share three perspective-shifting facts about how markets actually behave.

Understanding Corrections – The annual market sale

In the investing world, a correction is defined as a drop of 10% or more from a recent peak. While that sounds alarming, it is actually a remarkably routine event.

• On average, a market correction occurs once every year.
• Historically, the S&P 500 has seen an average intra-year drop of about 13% to 14%.
• Most corrections are short-lived, lasting an average of only 54 days.

A correction is a market reset. Just as we have four seasons, the stock market has periods of winter. Since 1900, investors have encountered as many corrections as they have had birthdays. If you are 50 years into your life, you’ve likely lived through roughly 50 of these dips.

Correction vs. Bear Market: Knowing the Difference

Many people mistakenly use the terms correction and crash interchangeably. In reality, they are very different animals.

• A Correction is a dip between 10% and 20%. These are usually driven by short-term sentiment or technical profit-taking. The current markets are a good example.
• A Bear Market is a sustained decline of 20% or more. These are typically driven by fundamental economic shifts, such as a recession.

An important point to note is that fewer than 20% of corrections turn into a bear market.

Be fearful when others are greedy, and be greedy only when others are fearful.

Warren Buffett

This means that 80% of the time, when the market drops by 10%, it is simply a blip on the radar.

If you sell the moment a correction starts, you have an 80% chance of being wrong and missing out on the subsequent recovery.

The Danger of the Sidelines

As an example, between 1996 and 2015, the S&P 500 returned an average of 8.2% a year. However, if you missed just the 10 best trading days in those 20 years (which often happen immediately following a sharp drop), your returns would have plummeted to just 4.5% !

Stay the course. No matter what happens, stick to your program. I’ve said ‘stay the course’ a thousand times, and I meant it every time. It is the most important single piece of investment wisdom I can give to you.

Jack Bogle

Perspective

 Market drops are the price we pay for the growth that stocks provide over decades.

When the next 10% drop arrives—and it will—don’t view it as a disaster. (Ed – We’re in the middle of one right now!!)

View it as a predictable part of the financial seasons. The goal isn’t to avoid the storms, but to build a financial plan (and a mindset) that can sail through them.

Your opportunity

If you’ve not yet put in place a sound financial plan and you’d like to know more, please feel free to contact us on 01626 305318 or via email here.

The value of investments can go down as well as up. You may end up with less back than you have paid in. Past performance is no guarantee of future returns.

The views expressed are not to be taken as financial advice. Professional advice should be sought before proceeding.