What to Do When a Market Correction Begins

With the recent drop of the S&P 500 Index, the TV’s talking financial heads have begun to ask: Are we wading into a bear market?  Or might the downturn signal the end of a multi-year rally inside a prolonged bear market?

You know the answer: nobody knows.  Of course, many market pundits will try to convince you that they know exactly what the future holds. And fund companies will tell you where to invest.

Rather than worry about the market landscape, we need to focus on our own backyards. That is, rather than attempt to time market moves, evaluate your own investment policy statement to ensure that your asset allocation is still in synch with your risk tolerance, timeframe, and goals.

Amidst all the market’s volatility and uncertainty, there is one constant. It is often a mistake to sell in market downturns.  In fact, as the market trudged along the slow road to recovery from the Financial Crisis, we saw a very sizable correction (20%) in the summer of 2011. The market had also stumbled to a lesser extent in the spring of 2010 (16%) and later in the spring of 2012 (10%). However, looking at our statements at the end of 2013, nobody remembers the worry sparked by those declines.

In fact, since 1945, the market has experienced 27 corrections of 10% or more, and 12 bear markets where U.S. equities lost at least 20% of their value.  The average decline was 13.3% over the course of 71 trading days. And, after every one of these pullbacks, the markets posted new record highs.

So, even if we do experience a correction, it’s not the time to sell. Investors who review their portfolios and stay the course generally wind up better off than investors who sell as soon as the market declines.

Remember, think about your backyard, not the global landscape.

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