Panic is Not an Investment Strategy
by A. Scott White, CFP®, ChFC, CLU
On Tuesday August 11, 2015, the Dow Jones Industrial Average fell 1.2%, with its 50-day moving average, or short-term trend line, sitting below its 200-day moving average, or long-term trend line, for the first time since 2011. This so-called “death cross” is considered a bearish omen for the markets because it suggests things could get worse in the remainder of 2015 before they get better1. In fact, by August 24 the Dow was in full correction mode, down 10% from its all-time high reached earlier this year. Oh my. Why would an investor care about nonsense like this that was featured so prominently by our financial media?
An investor should be concerned more about building an investment portfolio within a defined investment strategy that can support a retirement lifespan that could last 30 years for a couple retiring at age 65. What place does the current 200-day moving average have to do with that? Contrary to what the financial media would have you believe, I say not a thing! Please note these market observations:2
• Since the end of World War II (1945), there have been 27 corrections of 10% or more, versus only 12 full-blown bear markets with losses of 20%+.
• This equates to one correction roughly every 20 months, according to Dow Jones index maven John Prestbo, who points out that this average does not mean they’re evenly spaced out. Twenty-five percent of these corrections over the last 66 years occurred during the 1970s (the golden age of market timers), and another 20% occurred during the secular bear market of 2000-2010.
•The average decline during these 27 episodes has been 13.3% and they’ve taken an average of 71 days to play out—just over three months.
•From the beginning of the last secular bull market in 1982 through the 1987 crash, there was just one correction of 10% or more. Between the crash of 1987 and the secular bull market’s peak in March 2000, there were just two corrections, according to Ed Yardeni, global investment research strategist. This means that secular bull markets can run for a long time without a lot of drama.
•Since the stock market’s bottom in March of 2009, there have been only 3 corrections: In the spring of 2010 the S&P 500 began a 69-day drop of roughly 16%. The widely referenced summer correction of 2011 lasted for about 154 days and almost became a bear market. The correction during the spring of 2012 set up one of the greatest rallies of all time, although it was barely a real correction, sporting a peak-to-trough drop of just 9.9% in just under 60 days.
As an investor, instead of worrying about if another correction or bear market will take place, you should focus on what will you do when it happens. One of the best things you can do to prepare yourself for it is to have a written investment policy statement. At Scott White Advisors, we help all our clients prepare an investment policy statement designed to help them meet their unique goals.
1 “Dow Experiences Death Cross, But May Not Be Death Knell for Stocks”. Kristen Scholer, Wall Street Journal, August 11, 2015
2 A Field Guide to Stock Market Corrections. Joshua M. Brown, August 20, 2013
The information contained in this report does not purport to be a complete description of the securities markets or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing materials are accurate and complete. Any opinions are those of Scott White Advisors and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date subject to change without notice. Past performance may not be indicative of future results. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Strategies discussed may not be suitable for all investors. Investing involves risk and investors may incur a profit or loss regardless of strategy selected. Diversification does not ensure a profit or guarantee against a loss.