Market volatility picked up significantly in August and US stocks have been teetering in and out of correction territory ever since. Uncertainty is pervasive and investors’ nerves are rattled. At times like these, it’s more important than ever to manage expectations and maintain appropriate expectations.
A market correction is generally defined as a pullback of 10%. Historically, the US stock market has experienced a correction once per year, on average. Once they take hold corrections typically play out in a matter of months. So while the current pullback isn’t abnormal, it may feel more poignant than usual because US stocks have not experienced a correction for several years (which is actually abnormal).
Something to keep in mind is that the current correction could accelerate into a bear market. Historically, bear markets decline at least 20%, and in severe cases can extend to 40%, 50%, or even more. In addition, bear markets can last for years, not months.
The point is that if the current sell-off has you rattled, then you should mentally brace yourself for potentially, two, three, or even more times the volatility. If you cannot stomach it, then that may be an indication that your portfolio allocation is not appropriate for your circumstances.
I’m not saying we’re headed into a bear market — honestly, I don’t know and nobody can really predict what the market will do next. What we can do is ensure our portfolios are properly aligned with our needs, goals, and circumstances. Not only will this keep risk in line with our tolerance for it, but it will also help establish a reasonable range of expectations.
Seeing your portfolio stay within an acceptable, pre-determined range can provide mental support and help you rest at night when you need it most – when volatility picks up. To that end, having the right allocation from the start is key. Like the saying goes “there’s never a wrong time for the right allocation.”
Victor K. Lai, CFA
This blog is for informational purposes only. Nothing on this blog represents advice. Investing is inherently risky and involves the potential for loss. Victor Lai does not own any of the securities referenced in this posting. Clients of Bellwether Capital Management LLC may own shares of the securities referenced in this posting.