Stock market declines are not something any of us want to experience but they are normal occurrences.
It isn’t If the next decline is coming, it is When. It will happen.
Some History: Since 1900 declines have varied widely in intensity, length and frequency. Here’s a review of declines since 1900:
|How Much||How Often||How Long|
|-5%||About 3 times a year||47 days|
|-10%||About once a year||115 days|
|-15%||About once every 2 years||215 days|
|-20%||About once every 3.5 years||341 days|
Source: Capital Research and Management Company
What do these declines mean to your investments?
- For example, if you have $100,000 saved and all the money is in stock mutual funds, a 10% decline is $10,000.
- But, if your money is split into 60% stock mutual funds and 40% fixed income, then the numbers could look different. In this example, if there was a 10% stock market decline, the decline could impact the 60% of your portfolio. So,on $100,000, a 10% decline on 60% of $100,00 could result in a $6000 decline.That is very different from the $10,000 scenario above.
- A decline only matters if you sell and lock in the losses.
- We can count on the media to portray the next market decline as the beginning of some long standing catastrophic event and it will be portrayed to be much worse than it is. We know it will be exaggerated commentary. It will pass.
How to prepare?
Now that we know a stock market correction will occur, what can we do to prepare?
- Review your time horizon and risk tolerance.The shorter the time horizon and the lower your risk tolerance means you should have less invested in the stock market. Remember though, even if you are retired, money needs to be invested in the stock market so that you can keep pace with inflation.
- As a reminder – no one can predict when market ups and downs will occur. As recently as last year, the market prognosticators predicted a decline for 2016. And in February there was a 10% decline. But 2016 turned out to be a great year.
- The trouble with getting out of the stock market (sell) means you also need to decide when to get back in (buy). There are people who sold out in 2008 and 2009 and never got back in.They have missed one of the greatest bull markets in history.
- My advice continues to be: Diversify investments, Rebalance and be Patient.This is my favorite mantra.
So when the time comes, we will fasten our seat belts and go on the ride together.
As always, please reach out if you have any questions.