Over the last few
What is a Correction?
The last two corrections of the stock market happened in April and January 2018. A correction, in Wall Street terms, is a decline of 10 percent of the stock market from its most recent peak. By this definition, as I write this in early December we are in a correction.
Corrections are Normal
These type of market actions are fairly common, happening on average every few years. This year we had more than one. The unique part about this one is, I’m paying close attention. As noted I’m not doing this to observe my portfolios value, that would be a foolish idea prone to driving poor investing behavior. No, this time I am observing the behavior for curiosity sake.
I find it pretty interesting too. If you read forum commentary and the news media you would think the sky is falling. Questions about what to do when your account loses money or even proclamations about the death of certain market sectors are rampant. The articles scream of all the lost money. After all, 10% of a large portfolio is a lot of money.
Are Corrections a Meaningful Measure?
And yet this whole scenario has me questioning the value of tracking corrections at all. Let’s start with a wake-up call. The market is down 10% from its high for 2018. That being said, as of this writing, it is nearly statistically insignificantly changed from where it was on January 1st of this year. If you go back to 1 year ago today it is actually insignificantly up for the year! In fact, compared to the lowest point of 2018, April, the S&P 500 was actually up 3% for the period ending now. And yet everyone acts like it’s the end of the world. It’s a very interesting case study on recency bias.
Less than Expected Decline
The funny thing is I myself wrote a post during the April crash asking if it was time to execute market timing. Despite the somewhat tongue in cheek title, the implication of the piece was that many in the world believed the market was on a downward trend. I basically wrote that no one knows what the market will do next, so hold tight. And you know what had you bought that day those funds would show
The reactions of the media and investors are a little scary. When we began this year with talks of a downturn I have to admit I found it feasible. I still didn’t change my investments given the poor track record of prognosticators predicting future market gyrations. But I have to admit I took action to shore up other areas of my financial life just in case a recession was on the way. And by a recession, I mean a plausible real pullback of both the stock and job markets. Something on the manner that would push stocks back in valuation a few years, not a few months. Something where job markets might tighten a bit and some companies might cut back on hiring and salaries. You know real concerns to the majority of people.
A Recession has Not Materialized
Yet none of those real concerns materialized. And yet because of that recency bias collectively investors are having heart palpitations over a yearly return of essentially 0. And that is the scary part. If people are so ill-prepared or worried about a correction to a few months ago, what will they do when we have a real decline to values seen years ago?
A Gentle Reminder to Stick to Your Investment Policy Statement
Now seems as good a time as any to give this reminder. If you feel any stress or concern at all over this year’s correction, it’s time to reassess your asset allocation. Your asset allocation is designed to help you sleep comfortably with major corrections and recessions. You know the ones where the market drops 25% and layoffs start occurring. These happen fairly regularly in the economy and you should be adjusting your risk tolerance to handle these situations. You shouldn’t even notice a correction like this
For anyone else reading this who like me is shrugging off the change, a question arises. As I observe this behavior I begin to wonder if a correction is really a viable means of monitoring market behavior. On the one hand, one could make the case that a 10% decline after a year with a 20% increase is
Then again that is the appearance of another bias which I myself am exhibiting. Anchoring bias is when you compare new values to an arbitrary number, whether it occurred last week, last month, or 10 years ago. Using that value as a basis of comparison of what happens next is a completely baseless comparison. Your choice of investments should only reflect whether you expect the investment to do going forward, not past performance.
Our Performance Over the Last Year
But then again it doesn’t negate the point that most people with large portfolios executing buy and hold have seen no real change in their assets. For reference, the
So what do you think, is there a better way to monitor stock market moves than a correction? Are you currently experiencing anxiety over recent market performance? If so have you considered you may not be invested correctly?