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The Coming Market Drop?

January 05, 2021
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The Coming Market Drop?

 

Let’s face it, the year 2020 wasn’t one that most people would want to enjoy again.  From a stock market investor’s standpoint, however, it was an excellent year.  The stock markets seemed to defy gravity and even closed the year with record highs.

While there’s no telling the short-term direction of the market, usually such a strong period of returns leads us to expect that a correction, or drop, of sorts is on the way.  Rarely do markets simply continue such an upward surge without some hesitation.

To be sure, 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.”[i]

Of course, a 10% drop in your portfolio is never comfortable.  There’s always the temptation to tell yourself “but this time it’s different” even though the data above suggests it probably isn’t.

So if we’re expecting that a pullback is coming (even though we’ll never know exactly when; it’s not possible to consistently time the market), the question you should ask yourself as an investor is “How will I respond if/when a correction happens?”

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.

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[i] Fidelity Investments. "Reflections on Corrections." Sept. 3, 2020.

Notes:  All investing involves risk including loss of principal.  No strategy assures success or protects against loss. 

You cannot invest directly in an index.

The economic forecasts set forth in this material may not develop as predicted.