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Let's Talk About Stock Market Corrections

By: Devan Robinson

My main goal for this blog is to provide a source of clarity and insightful commentary on the world of investing and financial planning.  Lucky for me, the stock market gave me my first post idea this month – let’s talk about stock market corrections!

A correction is defined as an investment falling 10% or more from its peak.  The stock market news headlines this month have included all of the great attention grabbing words: crash, plunge, death-cross, gold, Dow 5,000, and the list goes on.  If you turn on the news, my favorite characters will be there.  You will see the “expert” who predicted the last market decline (they don't mention the 27 other predictions that never happened).  You will see the guy who wants you to sell everything and buy gold (my favorite, we will come back to him later).  The pundits in the media are having a field day, and they will not be going away anytime soon.  Do not get me wrong - corrections can certainly be stressful and emotional, but for the long-term investor this is a blip on their radar.  What many pundits in the media are not going to mention is that stock market corrections are normal, not uncommon, and even healthy.

As many of my clients know, a big focus of my practice is digging for the truth.  I focus on filtering out all of the noise (there is a lot) to provide clarity, insight, and guidance so my clients make the right decisions for themselves.  This has become increasingly difficult in the era of the 24-hour news cycle, where many times the airtime goes to the one who yells the loudest.

Let’s take a look at the behavior of the S&P 500 (a broad basket of large U.S. stocks, commonly used as a gauge of the stock market in general) over the last 35 years.  I am a big fan of the chart below, courtesy of J.P. Morgan Asset Management:

Past performance is no guarantee of future results. Indexes are not available for direct investment.

This chart shows us the calendar year returns (gray bars) of the S&P 500 and the intra-year decline for that year (red dot).  Essentially, where the lowest point was that year and where the year finished.  The key takeaway points are:

  • The S&P 500 finished the year positive 27 out of the 35 years - over 75% of the time!  Interesting.
  • The far right column is us right now.  Ouch.  But wait, what we notice is that the -12% is not that uncommon.  In fact, the average intra-year drop was 14.2%.  We actually haven’t hit the average low yet this year.
  • The truth is corrections are pretty normal.  On average they happen once per year.  This correction is not an unusual market event.

Market Corrections are Healthy?

I mentioned earlier that corrections are healthy – how is that?  The stock market tends to reward the investor who is patient and committed to their plan.  A lot of selling happens during corrections, and many of those trades are from investors who probably shouldn’t have owned equities in the first place.  That is one of the reasons why we spend so much time determining your tolerance for risk and building a long-term plan.  When your portfolio is planned correctly, we try to avoid making emotional selling decisions.  To those investors who left the market – I say adiós.  The rest of us will get back to work.

I know corrections can hurt, and I do not know when it will be over.  What I do know is that if you are investing for the long-term, do not lose sleep over this market correction.  Market corrections come and go, and are ultimately part of the price of admission to long-term wealth.

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