“The Stock Market is designed to transfer money from the Active to the Patient.” –Warren Buffett
I understand that the news may have you feeling a little anxious this week. Should you change the course that you have plotted? I will admit that I catch myself having that thought in the back of my head sometimes. Should I be doing something different for my clients and myself? I am only human after all and I see the same news that you do and I have fielded a couple of calls asking the same questions. I’m here to tell you, it’s ok to feel that way. What we should avoid doing is taking any unwarranted action while we are in a stressed situation, we should not act out of fear.
In the last 2 sessions, the S&P 500 erased more than 6.2%, which is the most over any 2-day period since August 24, 2015, and the last time before that was back in 2011, according to data collected by Yahoo Finance. That total correction in 2015 was 12% in total. But, without context, this doesn’t mean anything. So, what happens next? I can’t say for certain, nor can anyone else, but I can share with you what history tells us.
Since 1950, there have been 34 times where the S&P 500 was down by more than 6% over its prior two sessions. What happened then? Well, that depends on what time frame we are using. For example, the following 5 sessions (i.e. 1 week after), the market was up by 1% on average, but the 5-session performance ranged from +12% to -12%, as seen in this graph. Regardless, over the course of the next 250 trading days (i.e. 1 year after), the S&P 500 was up by 16.7% on average, according to this graph. Also, it is important to note that the S&P 500 was down only 4 of those 34 times a year later.
What information does this give us to make decisions with? Most of the time these sell-offs are not followed by big declines over the next year. However, there are times like in 1987 and 2008 where these were followed by large declines. There is often a chance that if stocks go down a little they could go down a lot. How many people sold in 2008 only to sit on the sideline for years while the market rallied ever upwards for the better part of a decade? Imagine, if you did sell today what would be the divine signal to get back in the market? In hindsight, we can all make perfect calls, but in the moment, life never shows us these signs so clearly. If it did, we would all be able to time the market correctly, oh what a world that would be!
Could the market be down a lot more? The answer is yes. Could it be up in a week, a month, or a year from now? The answer is also yes. I can tell you that every other time the market has been down, going back well over 100 years, it has rebounded. If you have money that you need today, or in the next 2-3 years, you probably shouldn’t have had it 100% in the market, to begin with. Could this time be different? Could catastrophe be at our doorsteps? Allow me to reply with the words of Sir John Templeton, “The four most dangerous words in investing are ‘This time it’s different.’”
We as humans enjoy certainty and unfortunately, the market does little to help us with this. Historically speaking, the market has performed well over long periods of time. As for the short term, we are all out here guessing. We just need to make really educated guesses and my education says to stick with your plan, assuming it was the right plan to begin with, even in the face of the current uncertainty.
I have no plans on changing my own personal allocation and I invest in portfolios very similar to some of my clients.
If you or someone you know is having a hard time, go back and read one of my previous newsletters that tackles “freaking out” and how to work through this feeling. It’s okay to freak out!