“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”
– Peter Lynch, Investor and Author
The last few months have been a tumultuous time in the stock market. Nerves and stomachs have been tested. During these times it is of the utmost importance to remain focused and stick to the overall plan that you have mapped out with your advisor. More often than not, overreacting can cost you more than riding out the storm.
Corrections and Bear Markets
A correction is defined as a 10% short-term drop in the market. When you invest in the stock market, these declines happen. There is no getting around them. Remember that no one really knows when one is going to take place. As Peter Lynch, Manager of the Fidelity Magellan Fund for 13 years, said, “That’s a euphemism for losing a lot of money rapidly. That’s what a “correction” is called. And a bear market is 20-25-30 percent decline.”
Bear Markets are longer term downturns of more than 20%. These likely precede a slowdown in the economy. With these downturns we, as advisors, try to limit your exposure. We will never advocate selling wholesale positions out of stocks, because again, timing a bear market is almost impossible.
Stay Invested During Volatile Times
Here are a few reasons to make sure you stay invested during these volatile times:
- Bear Markets, on average, last for 13 months; just over a year. I can assure you that they seem like they last at least twice as long as that, but for the most part, they are short-term compared to many of your time horizons. The average Bull Market lasts for 46 months, so if you painted a picture of five years in the market, you are 3.5 times more likely to be up than down in any given month.
- Human psychology is to act when something traumatic or emotionally negative is happening. Avoid letting your emotions rule your decision making. Let us circle back to Peter Lynch’s Magellan Fund. During Mr. Lynch’s tenure as fund manager, the Magellan Fund was up around 29% a year on average. That is an impressive number, but a study found that most investors in the fund lost money. That’s correct; the individuals lost money over that time frame because they sold and bought the fund at precisely the wrong time (most often) because they let their emotions get the better of them. That type of behavior is exactly what we try to preach against here at AlphaMark Advisors. I realize that the old saying, “It’s time in the market, not timing the market” may seem mundane, but it remains true.
- Let’s look at trying to time the market over the last 15 years. More often than not, one of the best days of the market will come after a large down turn. These are usually the days that most investors miss. If you had invested $10,000 on 12/31/2003 and missed the 10 best days of the market through 12/31/2018, your return would be cut by over a half. Just missing 10 trading days in a 15-year time frame, which is more than 3,700 trading days! Look at the numbers below:
If you look at even a shorter time frame than 15 years, let us look at 2018 during record volatility. These numbers implore you to stay invested.
Fully Invested 12/31/2017-12/31/2018 you had a -6.27% return. If you missed just 5 of the best trading days out of 252, you had a -20.52% return.
If you are uncomfortable with the amount of risk your portfolio has, please let your advisor know. It is always important to revisit some conversations on aversion, or appetite for risk after a year like 2018. Investors’ situations and goals change, so it is important to keep us all on the same page.
“When an investor focuses on short-term investments, he or she is observing the variability of the portfolio, not the returns – in short, being fooled by randomness.”
–Nassim Nicholas Taleb, author of The Black Swan