The Correction We’ve Been Expecting
Back in July I wrote about preparing for a potential market correction since the markets had gone up precipitously fast over the prior 18-month span. Six months later that correction is here and, in my opinion, is a necessary event.
Following the market bottom in March, 2020, the S&P 500 Index nearly doubled by last Summer. Such moves tend to lead us to falsely believe that markets can perform this way forever but, eventually, markets need to correct from time-to-time.
As I’ve mentioned before, market corrections market corrections are common. 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.”[1]
Since its inception in 1926, the S&P 500 Index has averaged an approximate 10% increase each year.[2] This is only an average, of course, so some years are better while some are worse. We didn’t have a 10% correction in 2021, so it stands to reason that we were overdue. Unfortunately, it’s impossible to time these events and foolish to even try. The fact that the correction came six months after I warned about it shows how nearly impossible it is to predict the short term direction of markets. Better to stay invested and follow the plan.
Of course, a 5% - 10% drop in your portfolio is never comfortable. But it’s completely normal and, as shown above, completely routine. In this case, I’d even argue that it’s absolutely necessary so that we can get back to normal expectations.
Those of you who have been with me for a long time know I generally suggest two ways to handle a market correction: 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. Now is the time to do that.
The second option, doing nothing, is also effective. If, as the information 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.fidelity.com/learning-center/trading-investing/markets-sectors/stock-market-corrections
[2] 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