As investors cope with their seventh market correction of at least ten percent since the Great Recession back in 2008-2009, we thought it would be beneficial to pass on some items we find helpful in addressing the stress that accompanies such drops.
First and foremost, recognize that corrections (defined here as declines of 10% or more in the S&P 500) as well as bear markets (declines of 20% or more) are quite common and essential for the economy as well as financial markets in order for them to regain equilibrium. In fact over the past one hundred years corrections of at least ten percent have occurred every year or two while bear markets come along approximately every four years.
Similar to the flu, market pullbacks are quite painful, scary and always seem terminal at the time. However, after recovery, they are soon forgotten. For us, it is therefore comforting to know that every market correction has been subsequently followed by record highs. Over time, the health of the market will improve.
Remain in your lane. Assuming that coming into the correction, your investment portfolio was aligned according to your long-term objectives, there is no need to now make drastic changes to those percentages unless after the pullback, it has become unbalanced. Perhaps your intended weighting is 70% equities, 20% fixed income and 10% cash. As long as that remains the approximate current weighting, then little action may be needed. However, given the catalysts for the correction (inflation, Russia, COVID, China, Supply Chain, the Fed, etc…), the securities within those asset classes may need to be adjusted.
If you must, take some incremental steps in order to sleep better at night. We often state that the benefits of investing go to those that have the fortitude to look past the short-term volatility and remain focused on their long-term objectives. However, if readjust you must, make them relatively small in proportion to the size of your portfolio. For example, raise cash by five or ten percent rather than by fifty or fifty-five percent! Address your worries without capitulating entirely.
Recognize that your greatest fears will be addressed endlessly by the media, drawing you, like a siren, to focus solely on the negativity surrounding the current market environment which, in turn, may ultimately result in you making poor investment decisions. Hey, that’s their job – air the clickbait, drawing you to constantly watch or listen and perhaps ultimately causing you to “protect your portfolio,” quite often to your own detriment. Our advice, pull away from the information overload and watch some baseball (go Mets!), your favorite classic movie, get some exercise or dig in your garden. You’ll thank us for it.
May we quote Mike Tyson? “Everybody has a plan until they get punched in the mouth.” Knowing that they are a fact of life, anticipate corrections and make a plan ahead knowing that once you are punched in the mouth, your tendency will be to focus on the pain and react accordingly. Acting proactively, ahead of the correction will give you a fighting chance to ignore the short-term pain and enable you to focus on the long-term benefits of investing.
Touching on the point of the uncertain environment in which we are forced to invest – “there’s certainly a lot of uncertainty. However, the longer that the uncertainty persists, at a certain level the more comfortable investors will be willing to invest amidst the uncertainty.” (Say that five times fast.)
There’s no garden without rain. Everybody wants to sun to shine daily. However, without rain (corrections) there would be no sun (opportunity). One does not occur without the other.
Finally, from Berkshire Hathaway CEO Warren Buffett, “the stock market is a device for transferring money from the impatient to the patient.” Be patient. This too shall pass.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-279-1044.