Just a few comments on all this market volatility the past few days…
So, the market opened sharply down this morning 500 points, before whipsawing into positive territory. As of now, the Dow is up 177 points, but it’s bouncing all over the place. Will it hold, and will we finish the day positive? Neither I nor anyone else on the planet knows for sure. My personal opinion is that there is more volatility to come. While that may cause concern for some, it really shouldn’t.
Corrections in the market (a downward movement from its peak of at least 10%), are a normal part of the investing cycles and simply unavoidable. It’s not a matter of IF it will happen, but WHEN. And given the market’s performance over the past 15 months, it really was inevitable.
So, how do you avoid them? There are two options: 1) accurately predict when it will happen and move to cash before it happens, or 2) stay out of the market.
Option 1: Predicting a market correction
Simply put, predicting the timing of corrections is impossible to perform with any consistency or accuracy. In fact, prior to the sell-off that occurred over the past couple of days, Goldman Sachs (one of the most respected financial institutions in the world), had announced a “high probability” of a correction in the coming months.
You might be thinking, “well if economists were saying it was going to happen, why didn’t we move to cash?” Economists and market commentators have been calling for a correction in this bull market for a lot longer than just the past few weeks. In fact, a correction/market downturn had been forecasted even well before 2017. But, would you have wanted to be on the sidelines during 2017? Look at the chart below, and I think the answer is pretty obvious.
(It is also important to note that Goldman concluded their analysis by stating they believe a bear market to be unlikely. Goldman also, only a couple weeks ago, issued their 2018 Economic Outlook, in which they forecasted a continuing strong economy for 2018.)
Option 2: What about staying out of the market?
As for Option 2, staying out of the market, it’s worth noting that all investment has some type of risk. Without risk, there is simply no opportunity for positive gains on your money. If risk were to be avoided at all cost, you would simply have all your money in a savings account, earning 1% and losing purchasing power every year. For the vast majority of us, this is simply not acceptable.
The fact of the matter is that the year-over-year average return the market delivers is a very healthy return on investment. As long as we stay disciplined and focused on our long-term plan, every indication is that you’ll do well as an investor. For that reason, I
I think it’s not unreasonable to rule out Option 2.
So what does all of this mean for you as an investor?
It’s the obvious answer – don’t panic, and don’t make reactive decisions out of fear. Those that did this in prior down markets really hurt themselves. In all the recent instances of market crises (the Tech Bubble of 2001, the Great Recession of 2008), those that stayed disciplined got out unscathed. Those two instances, by the way, were severe bear markets we’re talking about, unlike what this appears to be. So relax. We don’t take any undue risk; your portfolio is highly diversified and well designed to fare well through these market cycles.
As always, if you have any concerns or questions at all, please call don’t hesitate to get in touch!