I know we are hearing all sorts of scary information out there. The gamut ranges from “This is a normal market cycle correction” to “the markets are going to implode – go to all cash – NOW.” The truth is, we will only know which one it is after it is over. The pundits can predict all they want, but they don’t really know. The bigger question is: Does it matter if this is a normal correction or another 2008 when markets worldwide were down approximately 40%? As of today, February 3, 2016, here are a few year-to-date market index performance numbers:
S&P 500: -7.50%
Dax (Germany): -8.67%
FTSE (UK): -3.17%
NIKKEI (Japan): -10.43%
Hang Seng (Hong Kong): -10.95%
While negative markets can be unsettling, we have all been through this before. Without directly revealing my age, I was fresh out of college when the flash crash of 1987 hit. As we all stood around the bond trading floor, even the more experienced traders stared at the screen in shock, not believing what they were seeing. Within months, the markets had completely recovered and moved upward. Was this unusual? No, not at all. If you look at the following chart, you can see market recoveries from every major market correction and crisis from 1987 forward.
The first thing that jumps out is that these events are not rare – six major events over 30 years. Looking closer at the graph, though, is an illustration of how quickly, and to what degree the markets recover after a notable decline. In every instance, the markets are up significantly within five years of a correction/crisis. Most have experienced a meaningful recovery after three years. As you try to tune out the hype and fear, please bear in mind a few things:
The main reason we have bond holdings is to help mitigate negative markets, and they are doing their job. Unless you are planning on spending the entire value of your investments within the near future, your portfolio will have time to experience a rebound, if we can use history as our guide. Different markets will recover at different rates, part of the reason we diversify portfolios not only globally, but also among different size companies.
At Summit Financial Planning, we do not enjoy negative markets any more than you do, but if you look at historical returns, even the worst of times have not been permanent. Investors that have the most successful long term returns are the ones who stick to a philosophy of owning globally diversified portfolios, avoid emotional financial decisions, and also perform thoughtful rebalancing on their portfolios.