Though past performance does not guarantee future results, equity markets are traditionally cyclical. Some finance professionals regard the performance of major market indices during 2017 and early 2018 as Templeton’s euphoria stage of a bull market; during 2017, the Dow Jones Industrial Average (DJIA) increased in value by more than 25 percent.
In late January 2018, however, investors were again reminded of market volatility when broad stock valuations dropped significantly in a short period of time. During such market drops, while the specter of the Great Recession and possibly a depression may loom, let’s examine what a market correction is and what it might mean to investors— especially those committed to long term investing and to growing their retirement savings nest egg.
For most individuals (certainly those building their retirement nest egg), investing in securities is typically part of a long-term strategy with a time horizon of one to several decades to reach their financial goals.
A market correction occurs when a market index experiences a drop of at least 10 percent in a relatively short period of time — often done without strong underlying data correlations to support the drop. A correction is typically viewed as a downward adjustment in broad market value from a relative high-point in an investing landscape. While a relative market high could be due to a bit of overly exuberant investing, a correction doesn’t necessarily portend an all-out market crash due to a floundering economy. Rather it may be a modest adjustment that returns market valuations to a more sustainable and healthy long-term growth track.
The most recent market correction began in late January 2018, after the DJIA reached an all-time closing high of 26,616 points on January 26, 2018. After this, however, the index shed a bit over 10 percent of its value over the next few weeks, falling below 24,000 in early February before rebounding.
Whether a stock market correction is bad or not is a complex topic and really depends on your perspective and investment objectives. For most individuals (certainly those building their retirement nest egg), investing in securities is typically part of a long-term strategy with a time horizon of one to several decades to reach their financial goals. For investors who keep long-term goals in mind, short-term market fluctuations, even a correction from time to time, should likely not bother them, or coerce them to alter their long-term investing strategy.
Closely watching your investment portfolio’s balance, especially in the middle of a correction or general market downturn, may evoke an emotional, if not rash, reaction. Some investors, who take a more active approach in their investment strategy, may be prone to a hasty or panicked sell-off during a correction, likely resulting in actual loss of capital. In these cases, market corrections can be viewed as bad, as they may have a negative impact on the investor’s net worth, possibly including their retirement assets and the integrity of their long-term investing strategy.
On the other hand, long term investors may view market corrections as an opportunity to purchase equities at a discounted price. To the extent stocks, purchased during a correction at a somewhat lower price, regain their previous value in relatively short order, long term investors may view market corrections as a positive.
Like most aspects of investing, it is just about impossible to forecast what a short-term correction means for the equities market going forward. According to Peter Oppenheimer of Goldman Sachs, “the average bull market ‘correction’ is 13 percent over four months and takes just four (additional) months to recover.”
So while past performance does not always indicate the future, as they say, it is important to remember how the market has typically reacted to previous market corrections.
The past year or so has been a quite favorable period for equity investors. While the market’s course over the next several months and years is unknowable, the recent downturn in early 2018 of equity prices likely provided a buying opportunity for investors with a dollar-cost- average approach over a long-term investment horizon. So continue to focus on your long range retirement investing goals, and realize that while market corrections do periodically occur, they shouldn’t derail you from reaching your long-range investing goals.
The goal of investing is to grow your money over time. While you can’t control how or when your investments rise and fall, you can act to see that your portfolio composition stays on track with your goals. It’s important to review your portfolio on a regular basis to make sure it remains up-to-date and that it continues to align with your different investing goals and timeframe.
Periodically apply this 5-point portfolio tune-up to your investments. If you are uncomfortable actively reviewing your portfolio, you may consider seeking personalized professional advice
Start by reviewing your different investing goals: retirement, saving for college, house purchase, etc. Do your investments still support your unique goals?
Do you have a new goal—like a vacation home, or aiming for a higher income at retirement?
Has your family makeup changed? Do all of your investment accounts have designated beneficiaries and accurate allocation percentages? In the event of your death, having up-to-date designated beneficiaries with correct allocations for each of your accounts will keep these assets from passing through your estate in probate and incurring unnecessary legal and court costs.
Are your investments on track to meet your goals in the timeframe needed? Do you need to aim for increased investment returns or start contributing more? If your performance is lagging behind the appropriate market benchmarks, it may be time to adjust your investments.
Over time, some types of investments may become an oversized (or undersized) part of your portfolio, say, after a prolonged bull market for equities. Or maybe your risk tolerance has changed a bit as you edge toward retirement. Either way, consider rebalancing your portfolio and adjusting your mix of stocks, bonds and cash equivalents across your investment portfolios to reflect recent market performance and your personal risk tolerance level as it changes.
Many people forget about old accounts (past IRAs, CDs and 401ks or 403bs) and do not coordinate these older assets with their more recent investments. It may make sense to roll over and consolidate your older assets into a current employer’s retirement account (if allowed) or into a recent IRA. That will likely make your investments easier to manage
The information in this publication is not tax or financial advice. You are encouraged to review the provisions of your plan and to consult a financial or tax advisor on these and other tax and financial planning matters.
© 2018 Conduent Business Services, LLC.
The information in this publication is not tax or financial advice.
You are encouraged to review the provisions of your plan and to consult a financial or tax advisor on these and other tax and financial planning matters.
© 2013 Xerox HR Solutions,LLC