How to Respond to the Recent Market Correction
We are definitely experiencing a correction as markets are down by over 10%. And this includes both equities and fixed income, a feat that doesn’t often happen!
Percent Returns, Annualized for 1, 3, and 5 Years (as of May 6, 2022)
| Index | Year to Date | 1 - Year | 3 - Year | 5 - Year |
|---|---|---|---|---|
| Russell 1000 Index (Large cap) | -14.0% | -2.6% | 13.5% | 13.2% |
| Russell 2000 Index (Small cap) | -17.8% | -17.0% | 5.7% | 7.0% |
| MSCI ACWI x US Index | -14.2% | -13.7% | 3.5% | 4.0% |
| Barclays Global Agg Bond Index | -12.4% | -14.0% | -1.5% | 0.1% |
Source: Morningstar
Markets have certainly been on the edge lately with Russia/Ukraine, inflation, interest rates, supply chain, and COVID. And now, they are down quite a bit, if you look at the short-term. If you are an investor, your accounts are probably up over the last 3-years and 5-years, however, you are almost certain to have seen your accounts go down this year. And if you are sitting on cash, you are losing to inflation. So, what do you do?
Market Turmoil is Nothing New
I have been in the investment business for over 20 years and investing personally for over 35. I have seen markets go up and down many, many times. I am not numb to these swings, but I actually expect them and plan for them, so I am never surprised or too concerned when these dips inevitably occur.
I remember the stock market crash of October 1987 (“Black Monday”). That was the start of my professional career and those were very tough times in the US, and especially in Texas. I remember an older McKinsey colleague telling me about market movements and how crazy it was in the 1970s. He encouraged me to use the market crash as a learning experience and to start investing right away, to invest often, and to invest always, even when it doesn’t “feel” good. I listened and I did just that. I was fortunate in that the stock market (S&P500) bounced back 16.5% in 1988 and 31.5% in 1989.
Source: CNBC. Published in 2020. There have now been 28 corrections in the S&P 500 with an average decline of about 14%.
There were multiple market corrections in the 1990s: the 1990 recession, the 1997 Asian market crash, and the 1998 Russian financial crisis. For a young investor who hadn’t experienced these types of events, it was daunting. Yet, I just kept on saving and investing.
The 2000s would bring more market turmoil: the dot-com bust of 2000, the September 11 attacks of 2001, and the Great Financial crisis of 2007-2008. It was a rough time for a lot of people in the markets. The investment company I was running was hit hard as investors fled the equities markets for “safer ground.” A move many would later regret. As a more seasoned investor, I was using these times to rebalance and redeploy but did take some hits and got some financial bruises as I still did some rather stupid things (e.g. over-allocated to technology when I worked for a tech firm in the early 2000s).
You Cannot Predict the Market
When I moved into wealth management in 2015, I met people that went to cash after 2008/09 selling at a low, and were still in cash 8 years later! They watched the market rally almost 200% but kept waiting for the next big correction to get back in. Every day was regret, and a ridiculous hope they would see the market crash again and pick the right day to invest. In the attempt to “time the market”, they lost ground they will likely never make up.
These global and macro-economic events are not predictable, and they happen with remarkable frequency. So much so, that you should expect them and plan on them. If you look back over 50 years, you will see a market replete with moments of corrections and scares, and then ultimately, recovery.
Investor Behavior Hurts Returns
The Investment Company Institute tracks investment flows – and really investor behavior – between equities, fixed income, and cash. While it is not possible to predict the market, it is quite possible to predict investor behavior. When the market goes down, investors tend to exit. When markets go up, they tend to return. And in the process of “panic - exit - wait – return” they destroy value, selling at lows and buying back after recovery. Multiple studies show that investor returns lag market returns, and this is mostly a result of not staying in the market! (read: Why Average Investors Earn Below-Average Market Returns)
It’s in times like these that you have to ask yourselves some basic questions:
Do I need my money now?
If you did need it now, then having it in the market may not have been a wise decision in the first place. Most investors, though, particularly retirement plans, don’t need the money for many years so what happens in recent days is not that important relative to the longer-term time frame. If you are investing for the long-term, then risk is your friend, and what happens this week, month, quarter, or even year, really doesn’t matter.
What is my overall plan?
Everyone should have a plan. And a plan should contemplate the realities that markets go up and down. If you can’t handle the downs – which will happen - then perhaps you have the wrong plan or unrealistic goals. The good news is that historically broad diversified markets have recovered. It’s just a question of time.
Is there anything I need to do to get back to my target allocation?
Market corrections can mean opportunities: to rebalance, capture losses for tax savings, and invest more. Seeing corrections as opportunities and not threats can make a difference in both returns and attitude.
Remind Yourself of Investment and Market Tendencies
If you need a reminder that corrections come and go, here is a perspective on time and volatility: Are You Getting Queasy with These Markets?
If you need a reminder to keep your eye on the long-term horizon, read this: Seeing the Bigger Picture in Markets
If you think you can time the market, here is a good reminder of the risk of trying to do just that: What Happens When You Fail at Market Timing
If you need to be reminded that it’s about time and not timing, this picture is a healthy reminder: Time, not timing, is the best way to capitalize on stock market gains
If you are worried that current wars are going to wipe out your savings, here is how markets have done in past wars: Ukraine & the Markets
If you have lost faith in our government leadership, this is a good reminder that markets don’t care who is in charge: Presidential Election and Your Asset Allocation
If you are worried that a recession is coming and you will lose your savings, this piece may surprise you: How Stocks Perform Before, During, And After Recessions May Surprise You
Yes, this is a lot to read. The bottom line of all of these is: everything points to the value of keeping your emotions in check, having a diversified investment plan, avoiding guessing the market, and staying invested even if you think the world is falling apart. You will sleep much better and invest much better too by having a good, diversified investment plan and sticking with it.
