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Staying the Course During Market Corrections
C.S. Lewis once wrote, “When the whole world is running towards a cliff, he who is running in the opposite direction appears to have lost his mind.” This sentiment is particularly relevant in today’s financial climate, where headlines are dominated by fears of a market correction following a weak jobs report and a subsequent Nasdaq downturn. As recession concerns grow, it’s crucial to recognize that what seems like chaos in the short term is often just part of the market’s natural cycle.
Our Philosophy: Driven by Goals, Not Headlines
This recent market correction aligns with our earlier analysis, where we observed a speculative rush into the tech sector, fueled by fear of missing out on the artificial intelligence boom. Now, the market is reverting to the mean—a typical and necessary process in maintaining long-term stability.
At Intelligent Investing, we emphasize an investment philosophy that is designed to withstand market cycles with patience and discipline. Our clients’ financial goals, rather than fleeting news headlines, guide our decision-making process. We regularly review our clients’ specific risk profiles and make necessary adjustments to their portfolios, ensuring they remain aligned with their long-term objectives.
While we stay informed about market developments, we avoid overreacting to the alarmist headlines often seen on Wall Street. History has repeatedly shown that markets recover from downturns—whether it was the selloff in 2018, the COVID-19 crash, or the correction in 2022. Each time, the market rebounded to new highs.
Fear and Greed: A Dangerous Duo
Currently, the CNN Fear and Greed Index hovers around 19, indicating extreme fear in the market. We’ve seen it dip even lower in the past when short-term investors, driven by emotion, made impulsive decisions. As Warren Buffett wisely advised, “Be fearful when others are greedy and greedy when others are fearful.” This principle is central to our investment strategy.
It’s essential to understand that our clients’ portfolios are not limited to a single asset class like the S&P 500. Instead, they are diversified across multiple asset classes, including international investments, which helps spread risk. These asset classes are not 100% correlated, meaning when one zigs, another may zag. This diversification can mitigate risk, though it doesn’t eliminate it completely.
Utilizing Our Risk Software
Our proprietary risk software is a critical tool that helps us calculate a 95% historical range for portfolio performance. For example, a portfolio with a risk number of 45 might typically experience fluctuations between -8% and +12% over six months. These movements are within the normal range for such a portfolio.
However, markets can sometimes swing into 5% probability events, where downturns exceed the 95% historical range. While we can’t predict these periods with certainty, we’ve seen similar scenarios during the 2008/2009 financial crisis and the initial COVID-19 shock in 2020.
At Intelligent Investing, we regularly review our clients’ portfolios to determine if rebalancing is necessary. This doesn’t involve market timing, which is notoriously ineffective. Instead, we rebalance when we identify opportunities to realign portfolios with the risk parameters established during calmer times, all while considering the tax implications.
A diversified portfolio that includes both equities and fixed income tends to self-rebalance over time. When panic leads investors to sell equities in favor of safer assets, the value of fixed income typically increases as yields fall. Conversely, when the panic subsides, equities often recover and even reach new highs.
Preparing for Market Volatility
We’ve spent considerable time preparing our clients and their portfolios for periods of market volatility. By stress-testing portfolios, we provide clients with a glimpse of what their investments might look like during turbulent times. The key question now is whether to react in fear or to stick to the sound decisions that have been made.
Over the long term, equities serve as a hedge against inflation. A company’s earnings and revenues typically rise with inflation, contributing to higher stock prices. Since 1970, the MSCI USA has averaged an annualized return of 7.6%, outpacing the annualized inflation rate of around 4%. This is a testament to the power of long-term investing.
Understanding Market Corrections
A market correction is a decline in the value of a stock market index or asset, typically ranging from 10–20% from a recent peak. Such corrections are a normal part of market behavior, occurring nearly every year. Historically, equity markets experience a 15% decline on average each year, with deeper declines happening roughly once every five years.
It’s essential to understand that no one, no matter how informed, can predict the depth of this or any other correction. For long-term, goal-focused investors, these short-term fluctuations should be of little concern.
For those still in the accumulation phase, market declines present an opportunity to purchase shares at discounted prices. What the media portrays as a “correction” is often a “sale” for those accumulating assets. Conversely, for those drawing on their investments in retirement, it’s crucial to remember that portfolios are designed to serve financial plans, which are rooted in personal goals—not in reaction to current events.
As we navigate this correction, it’s important to remember the four scariest words in investing: “This time is different.” An intelligent investor knows that staying the course and focusing on long-term goals is the key to success during turbulent times.
If you or someone you know is feeling anxious about the current market, we would be happy to provide peace of mind and help reduce financial stress. Feel free to reach out to us at Intelligent Investing for a complimentary conversation about how we can assist in managing your financial future. Simply visit investedwithyou.com and click on the “Get Started” button.
