Last week we marked the 30th anniversary of the largest single day percentage drop in the history of the Dow Jones Industrial Average. October 19, 1987 came to be know as Black Monday as the Dow dropped 22.6% by the end of the day. In today’s market, that would be a decline of about 5,200 points! You may remember this day, or probably heard of it. But, what might come as a surprise is that for the full year of 1987, the Dow was actually up 2.26%. Crazy, right? It might help to know that as of September 30th, 1987, the Dow was up 36.94% year to date. And that for the previous two years, the Dow was up 22.58% and 27.66%. In this context, Black Monday, while drastic and frightening, doesn’t seem so out of line. This started me thinking about market corrections. As the stock market hits all time highs, are we due for one? And if so, what should we do?
A “correction” is a decline in the price of a security or market index of at least 10% (A “Bear Market” is a decline of 20% or more, but that’s for another day). In the stock market, on average over the long-term, corrections happen about once every year*. As the term suggests, corrections are a way for the stock market to re-value itself to a more reasonable level. That is, when a market gets too high a correction helps get the price back in line with historical norms. Of course, “historical norms” is a very subjective term.
It’s important to note that corrections are healthy, normal occurrences in the stock market. They need to happen from time to time because the market tends to get ahead of itself. As we all know, the stock market does not go up in a straight line. Without periodic corrections, the market could severely overheat (i.e. get very overvalued) and come crashing down. This would create a market with high volatility and magnified highs and lows. Also, corrections can help shake out short term holders – investors who are not willing to hold through the volatility. These investors may own a stock only for a short term price move, and not want to own the company long term. This makes the remaining investor base stronger.
So, are we due for a correction? Possibly. It’s been 21 months since our last one. And, we’ve only had two official corrections since mid 2012**. But no one really knows. (If someone tells you they do, RUN!) Many analysts thought we would have one at the beginning of this year. We did not, and the S&P 500 is up 14.75% year to date (as of 10/23/2017). And if we are due, what should we do? If you are invested for the long term, then the answer is probably nothing. In the long term, the market has always recovered from every correction and moved higher. This is how we got to the current all-time highs. As a long term investor it is important to make sure your portfolio is allocated correctly for your situation. Be careful not to let emotions make your decisions and stay on the path to reach your financial goals.
**”Market Briefing: S&P 500 Bull & Bear Markets & Corrections” 10/23/2017, Yardeni Research, Inc.
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An Investment Advisor registered through CUSO Financial Services, L.P., Gavin has 22 years of experience as an advisor in the Puget Sound area.
“I believe every client is unique and deserving of a personalized financial plan that will help them reach their individual financial goals. Before I make any recommendations, I like to get to know my clients. By asking the right questions, and developing an honest, trusting relationship I can really get a sense of what’s going to work best for them.”
Gavin graduated from the University of Washington with a BA in Business Administration and started his financial career with US Bank in the Investment Department. Prior to joining Verity in 2006, he spent eight years with Piper Jaffray.
So what is Gavin’s vision for his dream retirement?
“My dream retirement would be absolutely worry free: financially, emotionally, and in every aspect of life. My finances would be in order so expenses for travel, luxuries, and gifts for the kids, grandkids, and great-grandkids would be taken care of. My kids would be financially sound, so I would be confident in their prosperity. This would give me the freedom to travel and play and do whatever it is I want to do.”
When Gavin’s not working, he enjoys spending time with friends and family, watching Husky football, and taking weekend trips around the Northwest.
Gavin is registered to transact securities business in the states of WA, OR, CA, AZ, FL, HI, ID, IL, MN, NM, NY and VA.
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