Monday, April 8, 2013

What Should You Do About the "Imminent" Market Correction?

My wife and I just returned from a fabulous week in Italy.  We spent time in Venice, Florence, and Rome, with a quick day trip to Tuscany. La Dolce Vita!

I had the chance to do a lot of reading on the markets during our plane ride home yesterday.

Although the S&P was only off -1% last week, the tone of the market commentary was definitely negative. Most analysts seem to be bearish, and think that a major correction is imminent.  Heading for a safe shelter in either bonds or cash was the most prevalent recommendation.

Problem is, I'm not exactly sure why.

True, the market has started out the year strongly, with the S&P up more than +10% for the first quarter.  Markets, of course, never move always in the same direction, so I suppose calling for a correction is a pretty safe call.

On the other hand, I'm not sure that there is any need for a significant change in investment strategy.  Perhaps it is just the fact that I have never been a particularly good market timer (a deficiency, I might add, that is shared by most of my fellow investment professionals), but the fact that bearish sentiment seems so prevalent probably means that a major market collapse is unlikely.

I bought my first stocks in 1966, when I was 9 years old.  My father had always been interested in the stock market, and thought that my brothers and I should learn about investing. He gave us a few dollars, and told us to have at it.

Since that time, there have been 7 recessions, some of them very severe (1974 and 2008 in particular). There have any number of market "corrections", including declines of more than -50% in 1974 and 2008.

But the S&P 500 today stands at 1,554 vs. slightly above 80 in 1966. The average return since that period has been +7.75%.

Despite the nasty bear markets that investors have experienced in the 47 years since I first started investing, in only 12 of those years did investors lose money in stocks, and most of the time those declines were followed by significant gains the following year:


Vanguard founder Jack Bogle was featured in a recent post on the blog Business Insider, and made the same point that I have:

CNBC anchor Scott Wapner put the question to Bogle: "You say, 'prepare for at least two declines of 25-30 percent, maybe even 50 percent, in the coming decade.' For a buy-and-hold guy, that's a little concerning, don't you think?"
Bogle replied: 

Not at all. They come and go. The market goes up, and the market goes down. It's never failed to recover from one of those 50 percent declines.

I went through one in 1973-1974, I went through one in 2001, 2002, 2003; I went through another one 2008-2009. They're kind of scary – often terrifying – but it's typical.

Why it doesn't bother me is if you hang on through the cycle, that's the only way to invest. Trying to guess when it's going to go way up or way down is simply not a productive way to put your money to work.

In other words, assuming you have an investment allocation that makes sense for you, the best advice in anticipation of a market correction is probably to do nothing.