August: “Houston, We Don’t Have a Problem!”

Sep 2015

By now, investors have probably received their August brokerage statements and have one of two reactions:

1. OMG! This is a disaster and I have to figure out what I should do to prevent further declines.

2. Okay, let me get a grip and realize the market hasn’t fallen this much in over four years, and my portfolio has performed well during that time. It was bound to decline at some point.

The above responses are obviously two very different reactions, with one being better than the other.  Can you guess which one?  If you guessed #2, then you are correct.  It is difficult to make any conclusions about what happened to the markets in August, but it is important for investors to consider that intra-year market drops are far more common than what we have experienced the past few years.

The chart below is illustrative and makes my point.  While this more recent market drawdown of 12% felt awful, we’ve had two other periods over the past five years that were worse.  We’ve also had numerous instances where the market fell by at least 5%. Since 1950, the S & P 500 Index has had one-day declines of 3% or more nearly 100 times.  It has had two dozen days where it fell by 5% or more.  The main point:  every one of those declines has been followed by a rebound.  The rebounds sometimes come quickly, or can happen over weeks or months.

Interestingly, if you’ve had a diversified portfolio that includes bonds, you probably didn’t fall as much as the market did during those declines, which means you may have recovered quicker as the market improved–if you didn’t “go to cash” each time the market dropped.

In the end, I don’t think any one month defines a market.  Furthermore, I don’t think any one-month or even two-month decline says that a long-term globally diversified portfolio is bad.  In the weeks ahead, you’re going to start seeing headlines about how bad the months of September and October are for the market.  Ignore them.  The way to overcome declines is by having a long-term game plan, and long-term means having to deal with occasional painful market declines.


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