A quick glance at the stock market’s year-to-date performance shows a healthy 18% gain through last Friday – not bad considering the economic and political uncertainty around the world.
It might be fun to watch your portfolio go up in value, especially if you happen to be the type who keeps track of your balance on a daily basis.
Today I don’t want to talk about stock market rallies, I want to talk about stock market declines.
What happens when the stock market declines 10, 15 or 20%? What are you going to do then?
When the stock market declines, it usually does so in the face of some fairly significant negative news, like weak economic numbers leading into a recession, or sovereign debt problems that imply a looming financial crisis.
The reality is that there will always be negative news just around the corner. It is a fact of life just as bear markets are a fact of life. We need to get used to it.
Why is this important? Well, for one thing, bear markets and corresponding declines in portfolio values can cause us to do things with portfolios that ultimately are not in our best interest, like selling instead of buying when markets are down, or cluttering your portfolio with fancy sounding Wall Street products like inverse hedge funds or market neutral balanced funds, or something like that to soften the volatility. While these investments “might” reduce portfolio volatility in the short run, they will almost certainly reduce returns in the long run.
I came across this presentation by American Funds that highlights the regularity of market declines, and even bear markets. In the presentation it shows that, on average, an investor can experience a market decline of 10-15% every 12 months (not calendar year!) and a bear market every two years.
So, getting back to the current stock market rally – enjoy it while it lasts, because there is a bear around the corner!