Listen to Chad Groover, elder law attorney from Upstate Elder Law, talk about how the probate process works on our latest podcast. Consider joining us at our next First Friday Networking at Noon event (FFN@N) to hear Chad speak on this and other topics.
Stocks went into free fall on Monday, February 5, 2018, and the Dow plunged almost 1,600 points easily the biggest point decline in history during a trading day. The drop amounted to 4.6% the biggest decline since August 2011, during the European debt crisis. But it was nowhere close to the destruction on Black Monday in 1987 or the financial crisis of 2008. Still, for investors lulled to sleep by the steady upward climb since Election Day, it was a wake up call. With markets in the second longest bull market in history, a pullback or correction almost seems foreign. According to Wharton School finance professor, Jeremy, Siegel, “The recent market pullback doesn’t signal a bear market, but possibly a correction coming that will chase out the speculators.”
What is a Correction?
A correction is a decline or downward movement of a stock, a bond, a commodity or market index. The amount of the decline is at least 10 percent but not more than 20 percent. In short, corrections are price declines that stop an upward trend.
When the stock market starts tumbling — especially when it’s down more than 10% — many people panic and start to sell. They’re scared the slide could turn into a death spiral. Maybe they are being prudent and sensible. No, often, they are being irrational.
If you panic and move into cash during a correction, you may well be doing so right before the market rebounds. Once you understand that the vast majority of corrections aren’t that bad, it’s easier to keep calm and resist the temptation to hit the eject button at the first sign of turbulence.
Let’s all take a deep breath. As many commentators have noted, this market was overdue a correction, which is much healthier than continued parabolic increases in share prices. How much inflation are we really talking about? And by how much will new Fed Chairman Jerome Powell really raise rates? Has anything in the global economy fundamentally changed from a week ago?
A stock market correction isn’t necessarily a bad thing depending on the context you view the correction from. However, there are five important things you really should know about a stock market correction.
1. Stock market corrections happen often
The first thing you should know is that stock market corrections happen fairly often. The U.S. economy naturally peaks and troughs over time, and in response the stock market will also have its peaks and troughs. On average, there’s been a market correction every year since 1900. The S&P 500 has gone without a correction for about two years, an unusually long gap.On average, there’s been a market correction every year since 1900. Click To Tweet
Long story short, corrections are an inevitable part of stock ownership, and there’s nothing you can do as an individual investor to stop a correction from occurring.
2. Stock market corrections rarely last long
Corrections last for a shorter period of time than bull markets. Stock market corrections often tend to be on the order of a few weeks to two quarters in length.
3. Stock market corrections shouldn’t matter if you’re a long-term investor
If you remain focused on the long-term with retirement as your goal, then you’ll realize that stock market corrections really aren’t an issue The only people who should be worried when corrections roll around are those who’ve geared their trading around the short-term, or those who’ve heavily leveraged their account with the use of margin. Maintaining a long-term perspective has been the smartest way to invest throughout history – and it also happens to be a recipe for a good night’s sleep.
4. They’re also a good reminder to reassess and rebalance
It’s important that you reassess your holdings to ensure that the thesis of your purchase remains intact. Ask yourself one simple question with each stock in your portfolio: Is the reason I bought this stock still valid today? If the answer is “yes,” then no action is required, other than perhaps adding to your position. If your thesis is no longer intact, then it may be time to consider selling your position.
Rebalancing is another way to reduce risk in your portfolio. As US equities have had a strong run recently, they may be dominating the overall portfolio. By rebalancing back to pre-determined portfolio weights, the risk may be reduced, allowing you greater chances of achieving your goals.
5. Nobody can predict the future.
Unfortunately, know one knows what the future holds. It is important to have a long time horizon and accountability advisor who can be your behavioral coach, especially as market volatility may likely increase. At Intelligent Investing, we strive to align our clients’ portfolio with their financial plan, keeping in mind their ability to take on risk and their willingness to take on risk. As risk managers, we monitor portfolios and are alerted when portfolios breach a predetermined risk tolerance band. If you’d like to learn more about how we may help you manage your wealth to achieve your goals, please click here. We look forward to the opportunity of serving you soon.
Bonus: Here are the past 10 corrections in the S&P 500 index.
|Span of the correction||Decline in Percent|
|May 21, 2015-Feb. 11, 2016||14.2|
|April 29, 2011-Oct. 3, 2011||19.4|
|April 23, 2010-July 2, 2010||16|
|Nov. 27, 2002-March 11, 2003||14.7|
|July 16, 1999-Oct. 15, 1999||12.1|
|July 17, 1998-Aug. 31, 1998||19.3|
|Oct. 7, 1997-Oct. 27, 1997||10.8|
|Oct. 9, 1989-Jan. 20, 1990||10.2|
|Oct. 10, 1983-July 24, 1984||14.4|
|Feb. 13, 1980-March 27, 1980||17.1|
|Oct. 5, 1979-Nov. 7, 1979||10.2|
Expansion of 529 plans to allow transfers to ABLE accounts
The new tax legislation also allows 529 account owners to roll over (transfer) funds from a 529 plan to an ABLE plan without federal tax consequences. This ability to transfer funds will expire at the end of 2025 unless a future Congress acts to extend the law.
An ABLE plan is a tax-advantaged account that can be used to save for disability-related expenses for individuals who become blind or disabled before age 26. Like 529 plans, ABLE plans allow funds to accumulate tax deferred, and withdrawals are tax-free when used to pay the beneficiary’s qualified disability expenses, which may include (but are not limited to) housing, transportation, health care and related services, personal assistance, and employment training and support.
ABLE accounts have annual and lifetime contribution limits. Contributions from all donors combined during the year cannot exceed the annual gift tax exclusion ($15,000 in 2018). As for lifetime limits, each state sets its own limit, which is also the state’s maximum for its 529 college savings plan contributions. In most
states, this limit is at least $350,000.
A list of ABLE plans offered, by state, and a comparison tool are available at ablenrc.org.
Note: Investors should carefully consider the investment objectives, risks, charges, and expenses associated with 529 plans and ABLE plans before investing. Specific information is available in each plan’s official statement. Participating in a 529 plan or ABLE plan may involve investment risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful. Before investing, consider whether your state offers residents favorable state tax benefits for 529 plan or ABLE plan participation, and whether those benefits are contingent on joining the in-state plan. Other state benefits for 529 plans may include financial aid, scholarship funds, and protection from creditors.
In December 2017, the Tax Cuts and Jobs Act, a sweeping $1.5 trillion tax-cut package, became law. College students and their parents dodged a major bullet with the legislation, as initial drafts of the bill included the elimination of Coverdell Education Savings Accounts, the Lifetime Learning Credit, and the student loan interest deduction. Also on the table in early drafts of the bill was the taxation of tuition waivers, which are used primarily by graduate students and employees of higher-education institutions. In the end, none of these provisions made it into the final legislation. What did make the final cut was the expanded use of 529 plans.
Why Sticking to New Year’s Resolutions is So Hard
This is the time of year where most people make New Year’s Resolutions. One of the best ways to meet your financial goals is to break them down into smaller chunks. Intelligent Investing believes in minimizing financial stress to maximize your lives. We created this financial freedom plan that includes monthly tasks as well as things to consider buying and not buying each month. We love organizing our clients’ “financial junk drawers” and would love to organize yours as well. Feel free to share this Financial Freedom Plan with others.
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Intelligent Investing Financial Freedom Calendar
Intelligent Investing hopes you had a great holiday with family and friends. See Intelligent Investing’s latest market commentary for Q4 ending December 31, 2017 and outlook for 2018.
With the holiday season upon us and the end of the year approaching, we pause to give thanks for our blessings and the people in our lives. It is also a time when charitable giving often comes to mind. The tax benefits associated with charitable giving could potentially enhance your ability to give and should be considered as part of your year-end tax planning.