“Far more money has been lost by investors preparing for stock market corrections, or trying to anticipate corrections than has been lost in corrections themselves.” – Peter Lynch
Peter Lynch managed Fidelity Magellan Fund from 1963 through 1977 and grew the fund from $20 million to $14 billion. I would encourage you to read his comment again and take the meaning to heart.
Common quotes/topics of conversation today in the media, at the water cooler or over the back fence:
- When is the next recession?
- We have experienced an eleven-year Bull market. When will it end?
- It cannot last much longer!
- We are “overdue” for a “market correction.”
- This market is “artificially” high.
- The longer the market keeps going, the further it will fall.
I would propose that all of this is true…… and that none of it is true. This is merely my opinion and should not be taken as investment advice. Please read more.
Some Facts and Some Opinions:
- Markets go up and down
- It is impossible to determine with any accuracy or consistency when the stock will go up; how long it will go up; and when it will go down or when…..even though any number of pundits will tell you that they have the answers no one else does.
- The stock market is not the economy and the economy is not the stock market.
- Even though corporate profits affect stock prices and the economy will in turn affect company profits, stock prices will often move in “anticipation” of either growth or decline of profits well in advance of the actual changes of profitability. See the quote at the beginning.
I would propose, that most of us don’t really care about company profits or even the ups and downs of the “stock market” in general. What I find most people care about is the value of their statement. What is their bottom line account value? How much money does your account have?
Let’s talk about the potential change in your account in one specific set of circumstances. For the sake of discussion, your account is 60% invested in “stocks” (or maybe more specifically, mutual funds that hold stocks) and the remaining 40% is invested in bonds (mutual funds that invest in bonds). In this example, let’s assume “stocks“ in your mutual funds decline 20% and the bonds have no change in value.
Stocks and Bonds
Stocks tend to be more volatile than bonds. Often… but not always…. a decline in stock prices does not result in a similar decline in bond value. This is a topic for an entire newsletter. Please allow me to be a bit simplistic here and be sure to call me for further discussion if I am confusing you. --- These are general comments and not guarantees of future market movements.
In the example I started above, your $1,000,000 is 60% stock mutual funds and 40% bonds, and the “stock market” portion goes down 20%. Does this mean your $1M drops by 20%? NO !!
Remember, only 60% of the allocation is made up of stocks. The stocks you own may or may not be similar to the “index” being referenced to when the news says “the market declined by twenty percent.” So your stocks can and probably will be different than the “index.”
Only the portion of your account in stocks declines approximately 20%. So if your account is 60% stock mutual funds, then your account will be down by 12% (20% of 60%). So if your account had a value of $1,000,000 before the decline, the value after the decline is $880,000.
No denying it. That is a big deal. And if you were planning to buy something for $1M, this decline is a disaster. However, ask yourself:
- Do you have money to pay your bills for the next couple of years without selling some of the stocks that just went down?
- Historically, what has been the time frame for your stocks to recover from the last few market declines? I am not asking for your best recollection. I am asking you to actually look it up….you need facts and not the story in your head.
Market Declines are Relative to a reference point. What is your reference point?
- Are you comparing the account values month to month?
- Or do you compare today’s value with that from one year ago?
- What about three years? Five or maybe Ten-years ago?
A suggestion if I may. Comparing short-term values is great if you want to increase your anxiety or stress level in declining markets or give you increased optimism with permission to spend freely in periods of rising markets. Allowing your emotions and spending to be driven by short-term market movements is a bit like the “sugar high” after too much candy to be followed by a crash. Usually not fun to experience or even to watch.
Anticipating a market decline may be worse than the actual decline.
- See the quote at the beginning.
- Are you changing your investments to avoid the “crash” or are you changing investments to “rebalance back to your model?” Why is one a good idea and the other is not? And do you know which is which? Ask me if you are unsure.
- Is your attention fixated on the financial news feed on your phone? If so, ask me how a formal financial plan can reduce your stress/anxiety level.
- Have you considered how a market decline could be a very good thing for you and how you can use a decline to actually make money?
Thank you for taking the time to read my comments. For answers to these and other similar questions, give me a call and we can talk.
Any opinions/views expressed within do not necessarily reflect those of Voya Financial Advisors.
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