Reminders during a Market Correction
Transcript
2/22/2022. You may have heard that date happened earlier this week on Tuesday actually. My son’s elementary school did a couple of different things to celebrate the occasion. In Vegas, I even heard that they had the most weddings in any one day on 2-22-22. I guess people are maybe just looking for an easy way to remember their anniversary. Personally, I just had it engraved onto my wedding band but to each their own. 2-22-22 was also a day that investors will probably look back upon at some point in the future because that was the day that the S&P 500 officially entered correction territory.
Market Volatility
In today’s video, I just want to talk through a couple of reminders as the market enters another period of volatility. These are things you’ve probably heard before, but they’re always good reminders during this time period when the stock market enters a correction period. So as I mentioned in the introduction, as of 2-22-22 the S&P 500 entered official correction territory. Now an official correction in the stock market just simply means that the market has dropped over 10% from its previous high. So the previous high was on January 3rd of 2022 and by February 22nd, 2022, the market had dropped a little over 10%. So the first thing to keep in mind is that this type of volatility is not unusual for the markets. It feels a little unusual because, by all historical standards, 2021 was a pretty quiet year for the stock market. The biggest drop 2021 experienced was 4%. JP Morgan puts out an interesting chart each year. It shows that over the last 42 years, we have averaged intra-year drops of negative 7. 7% but of those 42 years, 35 of them still ended up positive. So, really the idea is that volatility is normal but most of the time, we recover it within the year and we end up the year in a positive positive number by the end.
Long Term Opportunity
The second thing to keep in mind whenever this type of volatility strikes is whether you are a long-term investor or whether you’re looking more for the short term. If you’re a long-term investor, this actually could be an opportunity to potentially put some cash to work in the market. Obviously, we’re not going to try and time the market and tell you that today is the perfect day to get in, but at the same time, if you’ve got a horizon of 5, 10, 15, 20 years and beyond, this could present an opportunity to put some money, sometimes called lazy money, into the market from your checking or savings account. It’s not really working hard there. This could be an opportunity to actually put that money into the stock market and feel comfortable that you’re getting into a good buying opportunity as your time horizon is over the course of you know 5, 15, 20 years and beyond. On the flip side of that, if you are a short-term investor or you’re somebody who has some cash needs over the next couple of months, that money should not have been in the stock market in the first place. As we work with clients, one of the most important things you can do is keep your advisor up to date on things that are happening in your life when we meet with you. So for somebody that’s been working with us, your cash needs really shouldn’t be affected by the current market drop because the money you would need either for your retirement income or for any purchases you coming up, should already be out of the market and somewhere a little bit safer. So, really looking whether you’re a long-term or short-term investor is also going to help you decide where we go from here with any money you want to invest.
Friendly Neighborhood Diversification
The third and final point I want to make for today’s video is just that this is the time period when diversification is your friend. Now, if you look back at the stock market in 2021, the S&P 500 returned a little over 26%. But if you dig in a little bit deeper, you’ll notice that that return was largely driven by just a handful of stocks. In fact, if you look across the board, diversified portfolios last year typically didn’t keep up with the stock market simply because there are parts of this economy that have not yet recovered from COVID or are still in the process of recovering from COVID. So in some ways, diversification could have held the portfolio back last year. What’s interesting is, looking at it this time period, diversification can actually help you. It will help mute the downside risk a little bit if you invest in things like bonds, real estate, or alternative assets. So while diversification last year may have harmed a little bit or didn’t help as much. In this time period, that diversification is really helpful. In fact, there’s an article that Lee Schertzer wrote a couple of years ago that talked about the idea that sometimes it feels like diversification can weigh way you down a little bit in up markets but it’s the anchor that’s going to hold you strong when the markets start to get volatile. Another slide from JP Morgan illustrates some of these points when you look back over the last 20 years of investing. You know, if you were just to hold the S&P 500 for 20 years, never sell, you actually averaged a little over a 7% rate of return. Whereas a 60/ 40 portfolio which is something we would call a moderate portfolio averaged about 6% return. The average investor actually only returned about 2% during that time period. So that tells us if you try to time the market and you try to look for opportunities to get in and out, those decisions often don’t work out very well. So, staying diversified is going to help minimize the risk in your portfolio, and makes sure that you have money in your portfolio when you need it, and help you weather time periods like this.
Stewardship Advisors is Here for You
Not that these reminders are anything new that you haven’t heard from us before, but I think it’s helpful to review a couple of those key points as the market enters what appears to be another period of volatile time. If you have any questions or want to discuss your portfolio or how it affects your situation, don’t hesitate to reach out. Give us a call. Shoot us an email. We’re happy to discuss your situation further.
Thank you.
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