Is This a Market Correction?
Maybe.
Maybe not.
The minute the market sells off, the calls and questions start…
“Should we sell?”
“Is this going to be a crash?”
Every news outlet has this topic front and center but is it important or even actionable for investors with a long-term plan?
In a word – No.
Why? Well, there are a few reasons.
One, you are not a trader. Well at least you should not be and if you are you probably suck at it.
Two, you may think you are “read in” on the next big sell-off or crash but you really aren’t. No one is. I promise, your intuition is not a good gauge. Just look at the chart below…it’s littered with pullbacks. You have to look real close. See all the little parts on the chart where it pulls back from a peak on its way higher and higher?
Ok, fine. Let’s say you are right and you sell now. What are you going to use as an indicator to get back in? Your intuition again? Good luck with that. Because if you time the sell off right, you just reinforced that you think you are a genius and will be biased to seeing more downside potential than upside. If I had a dollar for everyone who said they thought that the S&P 500 could be cut in half again when it was at 666 on March 9th of 2008, I’d have about 23 bucks.
And don’t get me started on “That Guy”. You know the guy, he’s “The Genius”. Unbelievable intuition. He probably passed on the pre-IPO shares of Facebook because his gut told him there was no way they were worth the $30 a share. He then patiently waited until they traded under $20. From there, his gut said snatch them up and he watched it soar to about $70 and dumped them. He then shorted them at 70… all based on gut feelings. Or better yet, in addition to his intuition, he claims to also know “a lot about the company.” Yeah, that guy. The Genius. He’s at every cocktail party and runs his own money on his days off from his real job. He’s also really good at forgetting his losses. Don’t listen to him. Especially if he is on TV. Google the Dalbar Study – the return of the average investor is probably very similar to his own returns. Or better yet, see what I wrote in U.S. News and World Report in November of 2011 after the heinous August sell-off.
Three, this stuff happens from time to time. 10% pullbacks are not uncommon but in the grand scheme of things are better buying opportunities that selling. Sh*t happens. It’s a normal part of life…and so do sell-offs and dips. It’s normal.
The slide below comes from JP Morgan Asset Management. It also helps to put things into perspective. It shows the S&P 500 calendar year returns with the bars and the largest decline (peak to trough) of the S&P 500 during that same year.
For example, in 2010, the S&P 500 was up 13% BUT ALSO had a market drop of -16% sometime during the year. What’s the bottom line? Since 1980, the S&P 500 has an average peak-to-trough loss of -14.4% every year despite having an overall positive return 26 out of 34 years. So if you are spending a lot of time fretting over a three day sell-off, go have a beer, a hot dog and chill out.
Finally, there’s going to be people that bring up the market crash of 2008. Yes, it was huge and very painful. For about 717 days.
What’s important about 717 days? That’s how long it took the S&P 500 to DOUBLE off the March 2009 low. And yeah, that’s a long time… except it was also a record. It was the quickest doubling of the S&P 500 since 1938. That link will take you to another U.S. News and World report column I wrote.
Even when REALLY BIG SH*T happens, it turns out if you leave it alone you probably end up better than ‘That Guy’. Having a real Private Wealth Plan and sticking to it through all the daily noise is the best strategy.
Go enjoy your weekend and don’t get all worked up about a few days of a pullback. One thing I’m sure of is that there will be another 10% pullback and probably even a 20% pullback. No one knows when, but it will happen. The best defense is to have a plan that removes the anxiety associated with any pullback so you can look beyond it.
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David B. Armstrong, CFA
President & Co-Founder
Dave got into the industry when he discovered his passion for finance in his mid-20’s. He’s a combat veteran and served as an officer in the United States Marines Corps on both active duty and in the reserves, retiring at the rank of Lieutenant Colonel. While serving on active duty, Dave was unable to spend money on deployments, so he became a self-taught investor. Along with a few bucks cash as a bouncer, his investing performance grew to be good....
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