We are nearing the 10-year anniversary of the stock market’s incredible recovery following the Great Recession which saw stocks lose 50% or more of their value. Since March 9th, the S&P and Dow are up nearly 300% while the US Total Market index is up 400%, not counting dividends. During this time, there have been six corrections in which markets have fallen more than 10% from earlier peaks.
While no one who owns stocks particularly enjoys market corrections, they are not only inevitable, they are valuable for free markets in that they ‘correct’ abuses and excesses. Continually rising stock markets tend to make lazy investors, CEO’s, bankers, and regulators. It is said that a rising tide covers many sins. Alternatively, deep and long market dives expose ineffectiveness and abuse, effectively weeding out weak investors, managers, credit risks, and policies, while making the survivors stronger and wiser.
Back in 1987, the Dow Jones Industrials dropped 23% on October 19th, a day that came to be known as Black Monday. In the months that followed, many companies downsized or went out of business. Two notables, IBM and Texas Instruments stayed afloat by laying off hundreds of talented executives and engineers.
The unexpected benefit of the layoffs was an unlocking of talent for a whole new generation of smaller, nimbler, more creative companies that would launch the Information Age. Companies like Apple, Microsoft, Dell, Cisco, SanDisk, Garmin, Vodafone, Amazon and Ebay benefitted from this new infusion of experience and knowledge that was previously locked up by the bigs.
Corrections can be tough on investors as well. Those who haven’t prepared themselves or their portfolios for choppy markets usually fall prey to emotions and either leave investing altogether or make changes that they feel better suit the times. They can hardly be blamed; the financial services industry is largely designed to cater to our animal spirits of fear and greed. But the unfortunate result is usually significant reduction in lifestyle.
Alternatively, those who understand the necessity of market corrections are better prepared to face them emotionally and financially. Their portfolios efficiently capture the returns of rising stock markets, but they also lessen the effect of corrections inherent in markets. Each decline better prepares them for the next to keep their emotions under control and pay less of their wealth to Wall Street and the US Treasury.
We are not expecting a big drop in the market anytime soon, but we and our clients don’t worry so much about them because our process is built on the experience of decades of market activity and a keen understanding of what happens to our portfolios good times and bad. Through continual simulations and testing we ensure that our clients’ wealth will not only survive the toughest of times, but that it will be enough to meet all their necessary and aspirational life goals.
Please give us a call if you feel a checkup is needed before facing the next market challenge.