Corrections are normal but that doesn't mean they feel good. How to get comfortable with being uncomfortable.
We get it. This is uncomfortable. The wild gyrations of the markets over the last few weeks has reminded some of the great financial crisis of 2008. Three months ago, most didn’t know what a coronavirus was. Now it’s impacting our daily lives.
THIS is what risk feels like.
Unexpected stuff happens, which is why being prepared is so important. It’s why we preach diversification and suggest building portfolios that include seemingly boring investments that don’t go anywhere, making us wonder why we own them. Now we know why.
Perspective is also crucial in times like these. History is not only a good reminder of the inevitable ups and downs of the market; it can also furnish lessons for what to do (and not do) when the inevitable happens again. Here are three to think about now.
Lesson One: Stay calm
It’s important to put the current markets in context. The S&P 500 Index ended 2019 up 451% from its bottom in March of 2009. That represents an average annual return of 17.1% over the decade. The S&P 500 is now giving back some of that gain. It feels scary, but it hasn’t taken away most of the gains we’ve enjoyed over the past eleven years. That said, don’t be complacent. Things can get worse before they get better.
Lesson Two: Stay invested
The terrific returns of the past eleven years have also come with very little volatility. The correction (an index down 10% from its peak) we officially reached two weeks ago was only the 6th such episode over the past eleven years. Prior to the current decline, the worst of the bunch (down ~20%) occurred at the end of 2018. The second worst (down 19%) occurred in 2011. In both cases, the market recovered and made new highs within five months. The other three corrections barely made it to 10%-down levels and recovered even faster than that. Corrections normally happen more frequently than we’ve seen in the past decade. When you’ve become comfortable watching your investments consistently go up, it can be quite jarring to watch them fall out of bed. But it shouldn’t chase you away from the stock market, especially if you have a long horizon.