From July 31st to October 27th this year, the S&P 500 declined by over 10%. Most people will rightfully view that as a significant decline. But is it all that unusual?
Turns out it’s not. On average, we’ll see a stock market decline of 10%+ about once every year.
Larger drops are less common, but should still be expected. A 20%+ drop happens on average about every 5-6 years. And if you review our investment philosophy page you’ll notice that we emphasize that most investors can expect to see their stock portfolio cut in half (a 50% decline) at least a few times during their life.
This is just par for the course when it comes to investing in the stock market. If history is any guide, stocks will continue to generally go up over the long-term, but the ride will almost certainly be bumpy. If the ride were not bumpy, then stocks wouldn’t exactly be risky. And without that risk, stocks would likely not be priced low enough to generate adequate future returns.
It’s never fun going through a market correction, even the relatively moderate one over the past few months. That’s why it’s so important to have a plan for your investments and be intentional about setting up your portfolio to suit your personal circumstances.
For example, if you are early in your career and a net-saver, then market drops can offer attractive opportunities to invest capital at lower prices. You also have a nice, long time horizon to help manage volatility. However, if you are a retiree, then it’s important to design a defensive asset allocation that allows you to continue living your life even in the face of market uncertainty. This can involve setting aside more stable assets (such as cash, money market funds, or short/intermediate bonds) that you can access in times of market stress.
I can’t emphasize this enough… whatever your situation, be sure to have a plan. Because the market corrections will happen one way or the other, it’s how we react to them that really matters.
