You probably noticed that US equity markets did not celebrate the Philadelphia Eagle’s Super Bowl win on Monday. In fact, it was the worst one-day point drop in history for both the S&P 500 and the Dow Industrial Average. (see #1 below)
We may be nearing that tipping point where the common discussion goes from “why can’t we have more stocks, I hate bonds” to “why do we own stocks at all”? The short answer is that we own both, all of the time, because you just never know where markets are heading in the short-run. (see #2 below)
I must warn you the rest of this post will have almost nothing to do with economics, market predictions, historical trends, or recommended portfolio changes. Nope, none. Now is the time to focus on investor behavior, not markets.
Take a deep breath and repeat as needed – “even after Monday’s drop, the S&P is still up 10% since September and has almost doubled in the last 5 years.”
Your portfolio is still okay. Your financial plan is still okay. Your retirement and future dreams are still okay.* Are you okay? (see #3 below)
Remember, you have stocks in your portfolio because they go up much faster than inflation in the long run. You have bonds in your portfolio because people really, really hate to lose money, and they plan on spending some of that money in retirement. Bonds don’t typically don’t lose money if they are high quality and short-term. (For example, none of the taxable DFA bond funds lost value on Monday, while stocks were losing 4%.)
If you are concerned about the markets, give your advisor a call. If you want to check in and get some reassurance, give your advisor a call. If you want to know exactly how much you have invested in stocks…you get the idea.
Tiffany and I have been talking about the coming market correction for quite a while. We might be there, and yet, we might not. 1998 saw five down days greater than 3% for the S&P 500 and still gained more than 28% for the year. In truth, no one knows where the market is heading in the short term.
#1 – Don’t confuse a point change with a percentage change. Sure it was the worst point drop in history, but that’s because we are at ALL TIME HIGHS! On a percentage basis, the market drop yesterday was not exceptional. On average, we have had 2% declines in the S&P 500 every 37 trading days; 3% drops every 131 days; and 4% drops every 303 days – or slightly less than once each year since 1970.
#2 – Our expectations are often influenced by recent experiences, i.e. recency bias. We forget stocks can go down while we’re in a bull market, and we “misremember” that they eventually can go up during a bear market.
#3 – Quick check up – has your personal situation changed? Is there any reason to believe your assumptions are unrealistic? Do you have sufficient emergency cash and at least 5 years of portfolio withdrawals in bonds? The natural tendency is to “do something” when markets correct. A successful financial plan shouldn’t require a response to changing markets – those fluctuations are already assumed in your plan. Doing nothing is your best option.
* I’m assuming you have a written financial plan that is up-to-date. If you don’t, there’s no way to tell if your portfolio or your retirement are “okay”. Now is probably a good time to give your financial world some attention.
- Past performance does not predict future returns. Always read the prospectus before investing.