Now that the equity market is inching back up to the levels we saw prior to the recent wild swings of volatility in August 2015 and January 2016, it's a great time to review the fact that volatility and corrections are a normal part of equity investing.
According to a study from the Capital Research and Management Company that examined the average frequency of market corrections from 1900-2010, a correction of 10% occurs about once a year on average. Corrections of 5% take place about 3 times per year.
Savvy investors know that corrections are simply part of the market cycle. They tune out the noise of headlines claiming an impending economic collapse and speculation as to why “It’s different this time.” They know that a complete strategy overhaul is not needed for “the new normal”…because in all likelihood, it’s just a change in the market cycle that their portfolios are built to withstand. They understand that a correction is probably the worst time to make a dramatic change anyway, since the research consistently shows that jumping in and out during volatile periods can be very costly to long-term returns.
If you are reading this, clearly you are one of these savvy investors. But we wanted to offer a simple thought exercise that we hope you can show your coworker with the crazy stock tips, or your friend who doesn’t know much about the markets and is feeling worried.
The average American lives to be 78.5 years old. That equates to 28, 740 days old. Assuming that there are usually 252 stock market trading days in a year, the average American will live through 19,212 days of trading, though he or she may not take advantage of all of them by being invested in the market (particularly in those first 10,000 or so days before earning a stable income).
We created a table to illustrate all of these days and how market downturns relate to them. It’s a simple table, and isn’t intended to cover all possible scenarios, but we hope it is impactful.
Each of these boxes below represents a single day of the average American lifespan. There are 78 columns (one per year) consisting of 365 rows. You can think of each column representing one year.
- Red boxes represent one 10% correction per year. Yellow boxes represent three 5% downturns per year. (Remember, in real life, a correction generally takes more than one day to play out—and it may encompass both up and down days. You only know for sure it was a correction in hindsight. For this reason, the red and yellow boxes simply signify how often corrections typically occur, not how long they typically last.)
- Green boxes represent the remaining number of days of stock market trading in a 78-year lifespan.
- Blue boxes represent the rest of the days in a 78-year lifespan where the stock market is not open (weekends, holidays, etc.).
This image should impress three points upon you:
- Corrections don’t occur with great frequency, but they do occur with regularity. There are many, many more green and blue boxes than red and yellow ones. But the red and yellow ones are there. You can expect them.
- The large majority of the days are green. This isn’t meant to show that every trading day will end with a positive return. Some will be negative, but below that -5% or -10% threshold. Over various time periods, the market has shown that it ends each day in positive territory about 50% of the time (even in bear markets). So the majority of market days end positive or flat. Having the fortitude to remain invested through downturns will increase your likelihood of success. Don’t let those few red and yellow boxes scare you. Selling during those times guarantees losses, while that sea of green boxes represents the (far more plentiful) days where you have the potential to increase your wealth for the long term.
- There are a lot of days that don’t have anything to do with the market at all. Even though this table is specifically quantifying days of the market as it to relates to days in your life, up days and down days obviously have very little bearing on your day-to-day experience. So rather than worrying about those ups and downs, focus on whatever it is that motivates you to save—whether that’s family, adventure, or something else.
The one resource we all have is time. Invest it wisely.
*This post inspired by “The Tail End,” Wait But Why
IMPORTANT DISCLOSURE INFORMATION
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Halpern Financial, Inc.), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Halpern Financial, Inc.. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Halpern Financial, Inc. is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Halpern Financial, Inc.’s current written disclosure statement discussing our advisory services and fees is available for review upon request.