Updated: Apr 27, 2021
"If I'd have had more time, I'd have written a shorter letter" ~Blaise Pascal
There is a market correction looming. Our guess is that it will happen this year and that it will be about a 15% decline from then-current market prices. What should you be doing to prepare your portfolio?
Today we're going to look at a chart we typically break out after a market correction, but based on the number of questions we've been getting, we thought it might be fun to review it in the middle of a huge bull market run. It is very reasonable to assume that a correction is coming this year and that it will be around 15% because, well… it happens pretty much every year. Take a peek at the chart below:
Looking back at the past 41 years, the red dots show us that significant market declines happen every year and that they average 14.3%. Looking at each year, we can see that double-digit declines are, well, kind of normal.
The more critical point of this chart is that while these declines happen most every year, the gray bars show that 31 out of the past 41 years have ended with positive returns, having recovered from the decline within the same calendar year. So, we won't be surprised to see a correction in 2021, especially since our own "recency bias" has been developed from participating in two bear market corrections (defines as a drop of 20% or more) in the last three years.
We learn from this data and experience that trying to time the markets with major shifts in and out of equities is not a workable strategy, but building a well-designed, diversified portfolio best serves investors who are clear about their long-term goals. That doesn't mean we won't make changes, and sometimes significant changes, to portfolios as we face future corrections, but it does give us the confidence that we have the tools to work through short-term events to develop long-term plans for success. Another chart that boosts our confidence in times of uncertainty is this one from our friends at AthenaInvest, experts in behavioral investing.
You can read their insightful note from 2019 in its entirety here. The important observation is that for the period in the chart, from 1928 to 2018, the market ended the year positively 73% of the time and that the large positives were notably larger than the large negatives. However, the negatives tend to stay ingrained in our minds more clearly.
With 2019 and 2020 now in the books, you can add two more blocks to the green side of that chart, improving that number a bit. As always, we are reminded that past performance is no guarantee of future success, but our confidence in the stock market as a long-term creator of wealth for those who approach it properly remains strong.
We look forward to being here for the next correction with you!
Make it a Great Day!
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