Mike Earl, CFP®, CPWA®
There is always a market correction coming. We don’t know if it will happen next week, next month, or next year.
We also don’t know how deep the correction (or corrections) will be in a given year. Dating back to 1980, the average intra-year drop has been 13.8% (via JP Morgan).
Some years, the decline has been much more (e.g. a 34% decline earlier this year from COVID worries).
Some years, the decline has been much less (e.g. President Trump’s first year in office, a maximum drawdown of just 3% in 2017).
Concern about a coming correction is not a good enough reason not to invest, because that concern will never go away. Essentially, you could use it as a reason to never add additional dollars to the stock market.
This is part of the beauty of 401k accounts (same goes for 403b, 457, TSP, SEP IRA, etc.). You invest every time you are paid via an automatic payroll deduction. Before each payday, you don’t ask yourself whether it’s a good time to invest. You just keep plowing money into stocks and bonds systematically, regardless of market highs or market lows.
Let’s turn back to the state of the US stock market today. Since we are back at all-time highs, is now inherently a sub-optimal time to invest? I’ll answer that question with another question:
- Were the 1950s or the 1980s bad times to invest? The US stock market was consistently setting new all-time highs during those decades, and then turned around and set a whole bunch more all-time highs in the years/decades to follow.
As Ryan Detrick of LPL has pointed out, new all-time highs tend to occur in clusters that can last a decade or longer. Our current bull market began making new all-time highs back in 2013. This does not guarantee the bull market will last a few more years, but it’s very possible that will be the case—especially with no real compelling alternative to investing in stocks (due to bonds and cash yielding very little interest).
What does this mean to you, our client?
We help our clients invest for the long-term. We aim to help our clients avoid short-term market timing decisions. We want you to stay the course, to carry on with life, and be prosperous over a lifetime of successful, long-term investing.
- JP Morgan Guide to the Markets, September 30, 2020 (https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/).
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