Over the past couple of years, there has been a parade of people who have been pretty vocal about an impending and significant market correction, some claiming that this is the longest-running “bull market” in history. For the record, it’s not. If we look at market cycles as sustained up periods of 20% or more interrupted occasionally by a 20% decline, this period from March 2009 through the end of September 2018 ranks fourth in terms of total return and duration. And it’s far behind the third-place finisher (December 1987 to August 2000) on both counts.
Nonetheless, the memory of the carnage of 2008 is still fresh enough to make a lot of people jumpy and susceptible to the notion that it’s possible to sell ahead of a decline in the market and then pivot on a dime to get back in before the next rally starts. In reality, though, bear markets are clearly defined only in retrospect; no one has ever been able to consistently predict them ahead of time. Investment legend Peter Lynch said it best: “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in the corrections themselves.”
Thus, being non-clairvoyant mortals, we must adopt a strategy to get us through these inevitable market downturns with our long-term investment plan intact. You know our strategy well by now:
- Diversify broadly within asset classes
This eliminates concentration risk. Investors concentrated today in either individual technology stocks or the technology industry, for example, are feeling this risk as I write.
- Diversify broadly among asset classes
As we’ve pointed out in previous articles, this market is being propelled by large-growth companies (similar, in ways, to the 1995-1999 period). Investing in small-cap, value, and foreign stocks may serve as a cushion in a declining market.
- Maintain a fixed income allocation
Many of our clients have an allocation to a short-term, high-quality bond fund. Downside risk is much more limited with this investment, it generates regular interest income, scheduled withdrawals can be taken from this side of the portfolio when stocks are falling, and it can be used to facilitate rebalancing (selling the bond fund and buying stocks at lower prices to restore the proper portfolio balance).
- Take advantage of sound counseling
We all reach a point in a market decline when emotions that could knock us off our course become a concern. Discussing these emotions with a trusted advisor in a productive and focused way can prevent rash decisions that destroy long-term wealth.
Below is a table showing 27 market cycles since 1926, ranked by total return. I think it’s clear that patience during the inevitable declines can be well rewarded.