Measured by the broad indices, the domestic stock market is in a 51/2-year bull market.
Between 2000 and 2002 the S&P 500 Stock Index and Dow Jones Industrials Index declined approximately 45%. A decline of this magnitude has occurred four times [in the past 100 years?]. That is, a decline this large typically happens once in a generation.
At some point in each decade the major indices have experienced a decline of 10 – 20 %.
But the same indices have risen in 3 of every 4 years since 1924.
All major asset classes (domestic equities large and small, international equities, real estate, government bonds, corporate bonds, etc.) have had positive returns over the last 5 years.
Call me a spoilsport, but experience suggests that everything does not rise endlessly. The typical bull market lasts fewer than 4 years; so 5+ years into the current bull market, a decline may be overdue.
When you continue to cover up little problems, a big problem often rears its head. For example, there is probably more bad news to come from the banks and brokerages. They have been in a feeding frenzy and are reluctant to stop.
I’m guessing we will have a stock market correction, with the S&P and the Dow dropping10 – 20%, maybe even within the next 12 months.
Why this is okay
Corrections are both inevitable and essential to the stock market, essential to better and more “ups.”
Stock market investments are long-term investments, money not to be touched for at least 5 years. Historically, stock market investments have appreciated, substantially, over the long term. Knowing how the market “misbehaves” in the short term should give you comfort.
Read the paragraph above again. Especially the part about “at least five years”!
Okay, but what to do?
Based on experience, we advise not jumping out of one sector or asset class and into another. That is how individuals lose out in a market dominated by pros and unpredictable forces. No one, not even a pro, knows the when or how much of market movements. But with a long term perspective and proper balance your portfolio will be fine and ready for the next jump upwards.
Author: David Jeter, CFP®, Allegheny Financial Group, November 2007
Securities offered through Allegheny Investments, LTD, a registered broker/dealer. Member FINRA/SIPC.
The above comments are provided for discussion purposes only and are not meant to be an offer of any specific investment.