Last week the markets saw increased volatility. Thursday was a 2.5% drop, and Friday’s gains were not enough to make up the losses. We’re still positive for 2021.
Even with last week’s drop, we are not far off from market highs. I continue to receive questions about a potential market correction. The answer is always, yes, there will be a market correction. This is normal. This is expected.
If you’re a baseball fan, you’ve probably heard a batter is “due for hit”. If you’ve ever kept score at a game, and a batter has failed to get a hit in his last two or three at bats, you would say he’s due. Meaning that if we look at his batting average, we would expect his next at bat to result in a hit. In statistical terms, this is called reversion to the mean. We return to something closer to the average.
In the stock market, we would expect that one of every three years in negative, even in a bull market. Remember, bull markets are up markets, because a bull’s horns point up.
Even in a positive year for the market, we would expect an intra-year decline. 2020 was a great example of this. At one point last spring, the S&P 500 was down 34%! Ouch – time to sell, right? Probably not. If you had stayed invested, the S&P finished 2020 up 16%. Wow – who wouldn’t want that? Now, a diversified portfolio wouldn’t return that – you are holding things other than just large US companies. That diversification may have also cushioned the 34% drop.
I know, 2020 is an outlier. Not a good example. How about 2019? The S&P 500 was up 29% in 2019. At one point, it was down 7%. In fact, going back 40 years, there is not a single year where the market’s overall return for the year was higher than the intra-year drop. Including 2008 when the market finished down 38%. At one point, it was down 49%.
I get it. These market drops are scary. The absolute best thing you can do is to use them as opportunities. Times to invest excess cash, complete a Roth conversion, tax-loss harvest. The second-best thing you can do is to stay the course. Keep investing through your employer-sponsored plan or in your IRA. Or just close your eyes, ignore your statements, and check back in a few months later. If you have a financial plan and a well-diversified portfolio that is aligned with your goals, don’t stress about these short-term drops. Investing is, by definition, a long-term thing.
Your action to take this week is to check your beneficiaries. For any retirement accounts, IRAs, employer-sponsored plans, life insurance policies, pensions. Make sure your beneficiaries are current and correct. Particularly if you’ve gotten married or divorced.
We have several events coming up, including our financial life overview based on CovingtonAlsina’s Hierarchy of Financial Priorities, called Adulting 101. These educational events are held on-line at no cost. You can find more information on our website at covingtonalsina.com, or visit our Facebook page.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. CovingtonAlsina and Great Valley Advisor Group are separate entities from LPL Financial.
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investment(s) may be appropriate for you, consult with your attorney, accountant, and financial advisor or tax advisor prior to investing.