Beacon Financial Strategies Financial Planning NC

Market Corrections are not Unusual

In Asset Allocation, General Financial Planning, Investments, Personal Finance by Chip Hymiller

The financial markets have experienced continued volatility since the end of April. In fact, with stocks declining in excess of 10%, the markets have officially entered a period of “correction.”   Although corrections are normal (and actually healthy for the markets), many investors may be a bit uneasy, especially with the wounds of the “Great Recession” still fresh in everyone’s mind.

A Perspective on the Recent Correction

In our prior blog post (Thoughts on Recent Market Turbulence), we provided some insight on the cause of recent market declines and offered some general investment advice that should apply to all long term investors.  With the markets continuing to decline, we thought it might be helpful to examine the magnitude and duration of past corrections (which all eventually ended!).  Here is a table that provides data regarding the 20 corrections that have occurred since 1928.

Observations

  • Since March 9, 2009 (the end of the Great Recession) to its most recent peak on 4/23/2010, the stock market, as measured by the S&P 500 Index, appreciated by 80%.
  • The average correction takes place about 18 months after the end of a “bear market” (defined as a 20% decline in stocks).  The current correction started about 14 months after the last bear market.
  • The average correction lasts about 54 days.  The current correction has lasted for 31 days thus far.

Investment Implications

While many people may feel anxious about the current market correction, what is happening in the markets should be expected from time to time.  In fact, those investors who have approached corrections opportunistically by making systematic investments and rebalancing their portfolios have been rewarded.  In contrast, those investors who make irrational investment decisions fueled by emotions of fear (or greed) are usually penalized by poor timing.

During periods of extreme market volatility, we often reinforce with our clients the attributes that differentiate successful investors from average investors.  Here is a list of those attributes that generate positive investment outcomes for successful investors:

  • Successful investors realize that it is impossible to time the market.
  • Successful investors do not engage in “performance chasing.”
  • Successful investors ignore media-induced market “noise.”
  • Successful investors realize that if it sounds too good to be true, it is.
  • Successful investors do not abandon well-thought-out investment strategies in response to a seemingly perilous (or overly optimistic) investment environment.
  • Successful investors approach market downturns opportunistically.
  • Successful investors understand that wealth accumulation is more dependent on one’s saving prowess than one’s investment prowess.
  • Successful investors do not make investment decisions driven by fear or greed.
  • Successful investors have the ability to recognize that when it comes to the investment markets, bad news is generally not that bad and good news is generally not that good.

Beacon Financial Strategies can help give you the peace of mind to become a successful investor.  Beacon maintains a globally diversified investment strategy that is based on a tried and true asset allocation framework.  With an emphasis on controlling investment risk, each portfolio is customized to meet a client’s long-term financial goals.  If you would like more information, or would like to schedule an introductory meeting, please feel free to contact us today.