Since its inception in 1926, the S&P 500 Index has averaged an approximate 10% increase each year.[1] This is only an average, of course, so some years are better and some are worse.
Last week, the S&P 500 reached a new all-time high and the index has gained over 16% this year…and its only July.
Rapid moves upward for the market always look great for your portfolio and tend to lead us to believe that this will be the new normal. But history instructs us otherwise and, with growing potential storm clouds on the horizon (increasing Covid cases, a recent spike of inflation, a looming debt-ceiling fight in Congress), the chances of a correction for the markets seem to be increasing. In fact, it wouldn’t surprise me to see a 10% correction in the coming weeks or months.
Reading the above paragraph might lead you to ask, “Then why not just sell right now, wait for a correction to happen, then buy back in?” The answer is simple: Because for that to happen, we need to be exactly right in our timing, and we would have to be right twice, which is a near impossibility.
In order to correctly time the market, we would have to be correct that the market is going to correct now, which is not a certainty. There’s no telling the short-term direction of the market. Despite all the concerns I listed above, the market could still advance before a correction. If it did advance, but we sold now, we’d lose those gains.
The second timing issue requires that we correctly guess when the correction is over. This is also almost impossible. We could buy back in after the market corrects 5%, only to have it go down another 5%. We would simply be guessing, and that is a recipe for disaster.
One final reason not to try to time the market is that we have history on our side. Market corrections are common. In fact, according to a recent report by Fidelity Investments, “Since 1920, the S&P 500 Index has—on average—recorded a 5% pullback three times a year, a 10% correction once every 16 months, and a 20% plunge every seven years. Corrections have lasted an average of 43 days.”[2]
Of course, a 5% - 10% drop in your portfolio is never comfortable, but it’s completely normal and, as shown above, completely routine.
Those of you who have been with me for a long time know I generally suggest two ways to handle a market correction: either add to your investments or do nothing.
Adding to your portfolio can be a great way to purchase more shares of your investments while they’re “on sale.” If you believe, like I do, that the market will grow over the long term, adding to your positions while they’re priced lower could enhance your long-term returns.
The second option, doing nothing, is also effective. If, as the report above shows, the average market correction lasts 43 days, doing nothing and keeping an eye on the long-term is certainly a good reaction. As the saying goes, this too shall pass.
Either way, over-reacting to short-term swings of the market is not advised. It’s important to have a solid plan in place and keep at it through all types of markets.
As always, I’m here to help. If you have any questions or wish to discuss this further, please don’t hesitate to contact me.
Regards,
Joe
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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.
Economic forecasts set forth may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Investing includes risks, including fluctuating prices and loss of principal.
[1] https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp#:~:text=The%20S%26P%20500%20index%20is,since%20its%20inception%20through%202019.
[2] https://www.fidelity.com/learning-center/trading-investing/markets-sectors/stock-market-corrections