Market Corrections are Normal

June 1, 2012

Corrections are a normal part of stock investing. The chart, below, shows that every year since 1980 has had an intra-year decline–but only seven of the 32 years had negative calendar-year returns. On average, these intra-year corrections lost 14.5%, but some years, like 2008, had larger sell-offs (-47%) and other years, like 1995 (-3%), had much smaller declines.

Many investors are now conditioned to view corrections as if each is the start of a bear market, but this is simply not true. Typically intra-year corrections haven’t led to further declines. There was a 19% intra-year decline in 1998, right in the midst of the late 90s bull market.

correctionsintrayear2016

Rather than forecasting where the market is heading this year or next year, we believe it’s more productive to think of corrections as buying opportunities, and as a chance to rebalance and add to equity allocations, if appropriate.

Stocks are the highest returning asset class over many years, so long-term money should have a significant allocation to stocks.  For long-term investors, stocks still offer attractive yields and compelling long-term value.

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