We live in a world of media sensationalism, and with more information being thrown at you now more than ever, it’s important to have the context surrounding the media’s reaction to the stock market’s recent decline. Whilst this market correction and talk of a recession can be very scary, especially as we all see our investment portfolios decline in the short term, there are a few key points to remember during this time.
The first point to remember is that market corrections are a normal part of equity investing, and the short-term volatility we experience is the price we pay for the long-term growth we receive. A great article from Ben Carlson highlights this, and I have summarised a few key points below.
- Since 1950, the S&P 500 has had an average drawdown (a decline from the peak to the bottom) of 13.6% over the course of a calendar year. Over this 72-year period, there have been 36 double-digit corrections, 10 bear markets and 6 crashes. This means, on average, the S&P 500 has experienced:
- a correction once nearly every 2 years (a loss of at least 10%+)
- a bear market once every 7 years (a loss of at least 20%+)
- a crash once every 12 years (a loss of at least 30%+)
- The more tech-heavy Nasdaq Composite Index goes back to 1970. Since 1970 there have been 25 corrections, 12 bear markets and 7 outright crashes. This means, on average, the Nasdaq has experienced:
- a correction once every 2 years (a loss of at least 10%+)
- a bear market once every 4 years (a loss of at least 20%+)
- a crash once every 7 years (a loss of at least 30%+)
The second key point in all of this is to focus on the long-term nature of investment strategies. This image from Vanguard provides context on the long-term performance of markets. You will notice that there are two severe market declines in 2001 and 2009, and yet despite this, the long-term returns from the US and Australian equities over the 30-year period have been 10.8% and 9.7% per annum, respectively. Nobody can time the market, with time in the market always being the key to long-term results. In times like this, it is more important than ever to remain focused on your goals and know that your investment portfolios and strategies are designed to be able to ride out these short-term storms.
Below, please find a summary of some of the biggest mistake investors make during a correction that we believe are crucial to avoid, and if you are feeling particularly anxious at present, then I would also recommend reading this article about quelling stock market correction fears:
- Trying to time the market (either by entering or exiting)
- Confusing their time horizon with someone else’s
- Failing to stick to their original investment plan (“losing sight of the goal posts’)
- Trying to outsmart the market
- Paying more attention to the stock market throughout the day than usual
Volatile markets are never going away, so risk management will always be an important part of the process. But the risk is subjective. For most investors, risk comes down to making a huge mistake at the wrong time. One of the key reasons we are here is to help you make smart decisions during a very difficult period.
If you have any queries, please contact Bruce Grieve at ua.moc.htlaewsyeltneb@eveirgb