We have seen this movie before…and it’s scary, but like Frankenstein and Dracula, it will eventually meet its end…
We can try to give you all of the reasons why the stock market is selling off…over speculation by investors, the Fed asleep at the switch holding rates too low for too long, causing over valuation of the markets, Government over-stimulus of the money supply causing record inflation, the geopolitics of Russia-Ukraine, and more variables than stars in the sky…
If we look at the market data(1) since 1985, the market is up 3 out of every 4 years on average. So even with (sometimes significant) drawdowns, most of the time the market finishes the year with a gain. We will see the market have double-digit drawdowns in two-thirds of all years, but 3 out of every 5 years have ended with a positive return. This leads to the rationale most investors are best suited to not try and time the market. If we look at the S&P 500 from January 1,1994 through December 31, 2019(2) if you miss the 10 best days of the market over this 26-year period, drops the overall return by 50%. The results only get worse as more good days are lost. The reasons? Trying to time the market without missing the top ten days without a reliable crystal ball is impossible; and, while many of the worst performing days occur during bear markets, so do many of the best performing days.
There is a myriad of reasons attributable to causing corrections, and they most likely don’t matter since we cannot control them. We may not know when, and we may not know why, but we can count on them happening, and have a plan to work through them.
One consideration for investors, as we see this in the data we collect with our Riskalyze surveys, clients risk tolerance goes up with long, strong markets as we have experienced since the 2020 COVID drop. Clients need to think about their risk tolerance over long periods that include drawdowns. Do not fall into the emotional trap of letting near term events affect your long-term goals. Plan accordingly.
Sincerely yours,
Dave & Drew