By Paul Vorstadt
…”Markets crash all the time. You should, at minimum, expect stocks to fall at least 10% once a year, 20% once every few years, 30% or more once or twice a decade, and 50% or more once or twice during your lifetime.” –Morgan Housel of Motley Fool.
As we know, too many investors have the habit of buying towards the tops of the markets and bailing out when things get rough – they’ll often sell towards or at the bottom of the market. It’s because the narrative becomes negative and our emotions change from one of opportunity to one of fear. Our emotions lead us astray and it is our emotional decision making that leads to losses and or very small returns for many investors.
It’s easy to stay the course when markets are going up, but when uncertainty hits, it’s often hard to remember all the reasons we thought it was a good idea in the first place.
We need to remind ourselves that corrections are a natural and expected part of investing that usually provides opportunity for the patient investor. Market corrections are healthy and they can return markets to more sensible valuations. During periods of uncertainty, by slowing down the process and reviewing what is happening against our long term plan we can prevent those costly knee jerk reactions.
Looking at the market performance since 2011 and really since 2009 the market clearly had gotten ahead of itself. As such the media in addressing this correction needs to take that into consideration. Unfortunately this is how the financial media is geared, pounding the table on the news of day while at the same time trying to entertain.
Looking forward there are several things that we need to keep in mind. Again, the most important of which is that corrections are a normal part of investing in the markets. Right now we believe it is premature to fear a market crash or long term bear market. The more prudent behavior is to take this correction as an opportunity to update portfolios. In doing so there are some key issues that investors need to look at.
What do the intermediate market internals of supply and demand look like?
What is the impact of decreasing oil prices? Is this good news for consumers?
What is the impact of rising interest rates on the economy? And over what period of time.
Is sentiment improving?
What is the outlook for both the domestic and global economy?
Canadian Business is projecting increased hiring over the next 12 months.
Is the US economy with its strong domestic demand able to withstand the European and Emerging Market issues?
What are the effects of a strong US dollar on Canada?
We are not saying that this correction cannot continue, but rather this is a good time to ensure your portfolio construction under the current economic and market conditions match against your long term goals and objectives and if so then to stay the course.
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