Three Terrible Days

Did you see this on the news? We were amused earlier this week when a commentator on a daily stock market program declared in horror that the stock market had been down three days in a row……Three days in a row!! Wow…...like it was the beginning of the apocalypse….or was it the beginning of a new, dreaded market correction? You know as well as I do that three days of a trend in the markets really doesn’t mean much. But it sounded so “daunting”. It perpetuates the “fear factor” and creates confusion. But, financial media know this is what keeps people watching and, of course, sells commercials.

Let’s look at what’s really happening. As bull stock markets go, the current one, which began in March 2009, has been pretty average or “normal”. There have been five corrections (market pullback) since March 2009 that have averaged about 13% and have lasted about 3.5 months. This is very much in line with the long-term averages. Corrections are normal and are healthy for the markets because they curb excesses and help maintain balance.

Granted, there have been some legitimate concerns lately about the potential for a correction based on a change in Federal Reserve policy and renewed debate over Federal debt ceiling. One thing we do know absolutely is that the market will correct again at some point. But we also know that the market has rebounded from every correction and bear market and that general stock market fundamentals remain sound.

So should you fear the coming correction or lay awake worrying about it? One of the best ways to protect an investment portfolio from inevitable pullbacks is through appropriate asset allocation and reasoned sector exposure. Holding multiple asset classes can help lower portfolio volatility and moderate losses in a correction. Reducing exposures to stocks and sectors that have performed extremely well is another way in which investors can mitigate the impact of a potential correction. The advice we give to clients is to develop a sound investment strategy or financial plan and stick to that strategy throughout the market vicissitudes. This helps to reduce the temptation to time the market and buy or sell at exactly the worst time.