Since the bottom of the recession in March of 2009, the markets have enjoyed a five year bull run and have soared to all time highs. When October began, it brought some extra volatility along that we all have witnessed in recent weeks. We are not at all surprised. To most financial professionals, a correction in equities is long over due. However, it's important to note that these corrections in stock prices are nothing new or out of the norm. They have happened before, and without a doubt, they will occur again in the future.
Thankfully, you are an evidenced based investor. You know that markets go up, and down, but the historical trend is up. You also know that when these corrections in the markets occur, the percent of decline in the market is actually the percent discounted off the price to buy the market. Oddly enough, market corrections are the only sales and discounts in our entire economic system which instead of attracting people, actually scares them away! Luckily, as evidence based investors, you know to buy and hold the market for the long term, diversify globally, and rebalance.
Going forward, your best approach to handling any market movement is to stay the course, stick to your investment plan, and remember not to panic.
Putting A Market Correction Into Perspective
Let's look at what has happened recently during the largest single day market corrections, and the amount of time until it returned to pre-correction levels. First off, a correction in the market is defined as a drop of 10% or more in a short period of time. In contrast, a bear market is a sustained period of time when the market is down 20% or more. When these corrections and bear markets are placed in the larger picture, we can see that since 1928 there have been 87 corrections in the S&P. In contrast, only 23 of those corrections sustained and turned into a bear market over the last 80 years. This means that throughout that time, the market is typically only down one out of every four years.
Most of you probably remember October 19th, 1987, as the infamous "Black Monday", when the market dropped 22.61% in a single day. This was arguably one of the worst days on Wall Street, and it took one of the longest recoveries of 465 days to reach pre-correction levels. On October 27, 1997, the market observed a 7.18% loss in a single day and recovered after 24 days. On September 17th, 2001, Wall Street took a hit for 7.13%, and proceeded to recover after just 52 days. On October 15th, 2008, the market dropped 7.87% and recovered after 19 days. Yes this correction, although it recovered quickly at first, still proceeded to turn into a bear market during the last recession.
However, we didn't let fear deter us from our financial goals or our investment philosophy. We followed our strategy and the simplest rule of investing, sell high and buy low through rebalancing. We didn't panic or try to market time, we just held on for the ride. As a result, we were rewarded with new all time highs in the DOW and S&P 500, far surpassing pre-recession levels. Counter intuitively, you have to learn to love the bear, if you truly love the bull, because down markets are the best buying opportunities. Historically, the highest returns have followed the biggest drops in the markets. Therefore you can't afford to have your money on the sidelines and miss the upswing because you are scared of the downswing. In fact, since 1946, the market takes just 111 days on average to recover after a correction. So while the volatility in the market is unnerving and even if it does get worse, historically, it won't be that way for long.
For more information, watch last weeks episode of Matson Money Live by Clicking Here. It's a fantastic presentation on the power of long term investing, even if you were to invest at the highest point before a crash.
Morningstar Advanced Analytics. 01/01/46 - 10/15/08