The most interesting emails I get after some of these Financial Advisor columns come after I have written about how we discuss various issues with clients. Readers have a lot of great ideas. So to start the year off right with an inbox of interesting interactions, I am going to share a few talking points I have used with clients and prospects regarding a few investment issues that keep coming up. If you are into market timing or tell clients you will get them market-beating returns, this will be a good column to skip.
With the market at all-time highs, I am worried about a big drop.
There is nothing funny about market declines, but I admit I often find the reaction to declines a bit comical. If you let the headlines lead your thinking, you might get the idea that declines are in some way odd, even rare occurrences. They are not.
Even a cursory review of market history shows declines of some significance come often. Yet, some financial planners go right along with the premise that a decline is a horrific event rather than the natural result of free markets.
According to Yardeni Research, since 1928 the S&P 500 index has experienced 46 corrections, defined as a decline of 10 percent or more. That’s more frequent than once every other year. In 20 of those cases, more than once every five years on average, the decline was over 20 percent. The longest stretch between corrections was just eight years. In 34 of the 35 years since 1980, the S&P 500 has dropped at least 5 percent at least once during the year.
Corrections and “bear markets” are so common, that experiencing them should be expected as a normal part of being a long-term investor, not something to hope will not happen. So, my first suggestion is to develop a plan to make sure your clients understand this and the typical media reaction to it.
Second, if your client’s life will be devastated by a correction, you have a lousy plan. A portfolio should be designed with the client’s goals and time horizon in mind. A correction should be inconsequential and a bear market should be something you can weather. If that is not the case, the goals may not be realistic.
Last thing to note is that the record shows corrections are not more likely at market highs. The frequency of declines in the U.S. stock market after the market reaches an all-time high is virtually identical to the frequency of declines after any other period.
This does not mean a correction will not occur. As I mentioned, they occur often and for all sorts of reasons, but the existence of an all-time high in and of itself is not the trigger.