Over the weekend I did a lot of reading and quiet thinking about the market’s action last week. Whenever the market goes down, the natural reaction is to want to do something. Often the smartest thing to do is to do nothing.
Here are my conclusions from the weekend’s study and contemplation:
- We are still in a bull market. Bull markets usually don’t end this way in an environment of low interest rates and rising corporate profits. Also, the U.S. economy is strong enough to weather economic disruptions in other nations, even China.
- Corrections are normal in a bull market. By my calculation, we have had at least 5 sizable corrections since the bull market begin in early 2009. The latest one was September of last year (-6%) and the biggest one was in 2011 (where the market fell 16%). Ten percent is the average correction size.
- Investors should not pretend they know what will happen in the short run. There are three possibilities – the market goes down, stays flat or goes up. Some people may want to sell because the market has gone down. That’s like closing the barn door after the horse ran out. If you think you know what will happen in the near term, you’re wrong. No one knows.
- In the long run, stocks provide better returns than any other asset class. This is an empirical fact. The volatility of stocks (as we are seeing now) is the reason why they outperform other assets. Stay with stocks.
Here are a few other ideas from smart people I respect:
Sir John Templeton (legendary fund manager) – “Even if everyone around you is selling, sometimes the best idea is to take a breath and hold on to your portfolio. In the event of a sell-off, only divest if you have identified more attractive stocks to pick up.”
Liz Ann Saunders – (Equity Strategist for Charles Schwab) – “I think that corrections are healthy. They bring sentiment. It keeps complacency from becoming pervasive… They are a cleansing process… Panic is not an investment strategy.”
Jason Zweig (Wall Street Journal writer) – “Don’t fixate on the news. [This] will make it harder for you to remain focused on your long-term investing goals. Don’t Panic. Don’t be complacent. You should use the latest turbulence as a pretext to ask yourself honestly whether you are prepared to withstand a much worse decline. Don’t get hung up on the talk of a ‘correction.’ What matters is the outlook for the future; that doesn’t depend on whether the market is down 10.2% or 9.8%. Don’t think you – or anyone else – knows what will happen next. The one thing you can be fairly sure of is that the louder and more forcefully a market pundit voices his certainty about what is going to happen next, the more likely that he will turn out to be wrong.” (See his full article here: http://blogs.wsj.com/briefly/2015/08/21/5-things-investors-shouldnt-do-now/)