If the stock market decline starts to snowball, you’ll hear about it from the news media—over and over. But we will pass along a thought based upon experience: Don’t become your portfolio’s worst enemy by allowing yourself to get caught up in the negative hysteria. Instead, remind yourself that the market has experienced 20 drops of 10% to 20% since World War II (plus 13 bear-market tumbles of at least 20%). Even so, the market has bounced back each time. Let’s go over some terms you will encounter in the news media:
“Correction” is an investment term being used loosely and often incorrectly by the media. A correction is a series of stock market declines over several days or weeks leading to a 10% to 20% decline from a stock market high. That would be a drop of approximately 2,700 points or more in the Dow Jones Industrial Average (a commonly used index to describe the stock market as a whole). And, most importantly, the stock market typically recovers in a relatively short time of 3 to 12 months.
A “bear market” is a decline of more than 20% from a market high over several days or weeks. A drop of 5,400 points or more in the Dow Jones Industrial average would be called a bear market. Bear market recoveries typically will be longer than corrections.
Market movements described above could happen fast. Trying to decide if a weakness in the stock market is turning into a correction or a bear market is known as timing the market. It’s nearly impossible to do. Just when you’re sure the 5 percent drop will turn into a 10 percent correction, the market rebounds and hits new highs.
Instead of using market timing, our strategy earmarks money you intend to withdraw during the upcoming years: 1, 2, 3, 4 or even 5 years. This money is assigned to more stable bonds and alternative strategy mutual funds. Secondly, we attempt to broadly diversify your portfolio across asset classes and sectors. That means holding a balanced mix of stocks, bonds, and alternative strategies. The stocks will attempt to profit from market upswings. The bonds and alternative strategies attempt to protect part of your portfolio from market drops.
The specific mix of stocks, bonds, and alternative strategies is called your asset allocation. It depends on your personal financial goals. If investors don’t need the money for years, then many investors will want to have a higher mix of stocks. Please contact me if you have questions about your portfolio’s asset allocation or whether enough money is earmarked for future withdrawals.