If you’ve never experienced a stock market correction until now (technically defined as -10% or more), you have either never invested or have only been investing since 2012. For the vast majority of others, you should know that markets “correct” on average at least once every 12-18 months. One reason why this feels worse than other corrections is because we just went 47 months without a correction of -10% or more! (third longest streak on record)
For a refresher, stock market corrections are short and sharp declines of -10% to -20%. They’re typically accompanied by sensationalized stories such as the European sovereign debt crisis, Greece’s exit from the Euro, or the “fiscal cliff”. For all those investors that ducked for cover and went to cash during the last correction you saw the Dow Jones move up over 6,000 points. Were you able to correctly “time” your reentry into the market? No…and you’re not alone. No matter what you read or hear there is not a single person or professional advisor that owns a crystal ball and can consistently time the market.
If you’re new to this monthly series…remember what we’re doing. This exercise, as we like to call it, is not an attempt to pick the best stock or “time the market”. We leave that futile task to those who own time machines and accurate crystal balls. For a refresher, see our first article on the MPG Core Tactical 60/40 Portfolio.
Here’s the current summary of the MPG Core Tactical 60/40 portfolio mix, which is updated as of this writing (September 1, 2015).
Click here to compare our portfolio against the benchmark.
From the last week in July to this writing the MPG Core Tactical 60/40 portfolio went down -4.49%. How did the rest of the markets do?
S&P 500 -7.29%
Mid Cap -5.58%
Small Cap -6.71%
Emerging Markets -13.50%
The bottom line is this: While it feels worse this time…it’s not. Those that are close to or in the retirement phase will naturally get spooked or feel more emotional than others. Times like this allow fear to creep in and make you second-guess your investment strategy. Making investment decisions or allocation changes due to this natural emotion is the worst thing you can do. Fear is not a strategy and mistakes made in times like these, or attempts to jump in and out of markets are often regretted for years.
What adjustments did we make?
Losses clearly hurt. Behavioral economists have studied the human brain and the emotions caused by loss. It’s been documented that people feel the effect of market losses twice as powerfully as they do market gains. Although we’re not advocating burying your head in the sand, we want to remind you that unless your goals changed drastically you need to stay calm and disciplined.
The MPG Core Tactical 60/40 portfolio made the following changes:
8/25/15: Sold 339 shares of Direxion Indexed Managed Futures (DXMIX) ~$13k
8/25/15: Sold 2,000 shares of Merk Absolute Return Currency (MABFX) ~$18k
8/26/15: Bought 300 shares of Apple (AAPL) @ $106.70 ~$32k
As vomit inducing as that Monday (8/24/15) morning may have been, there is some reassurance in long-term strategy by having something in your portfolio that you can sell in order to buy something that is being overly punished. Everyone wanted to buy Apple before it split at $700/share. Why not now? Is it really done being one of the best companies the world has ever seen? Do you think it might be over $200 in five years or under $50?
With the standard and passively managed 60/40 Benchmark we made the monthly and automated adjustment to the allocation. On the last trading day of the month we bought equities and sold bonds:
8/31/15: Bought 86 shares of IVV (S&P 500 Index) @ $198.75 ~$17k
8/31/15: Sold 199 shares of BND (Vanguard Total Bond Index) @ $81.58 ~$16k
What’s the magic move here? It’s the calendar telling us to buy what went down (stocks) and sell what went up (bonds). Why does this typically beat most portfolios? Simple: It takes out the emotion and fears we talked about earlier. Over time discipline wins out.
Where are we going from here?
Is this another 2008? Not even close!! During the “Great Recession” of 2008/2009 we faced a much more dire situation. It’s impossible not to think that we are entering a similar period; especially when we see stocks fall -3% or more on back-to-back days for only the ninth time in 30 years. Mind you, five of those nine times happened in 2008 so it’s easy and normal to recall what that felt like and get tricked into thinking we’re repeating history.
On the flip side of this we’re not minimizing the very real story of China’s slowdown in growth and their devaluation of the Yuan. Although China is the second largest economy in the world, one has to keep things in perspective. U.S. exports to China only represent 0.7% of our GDP. While they’re slowdown has clearly caused a panic it doesn’t mean we are entering a recession. Economic growth, albeit slow is still positive. We’re actually seeing fairly solid fundamentals; none of which smell of an impending recession.
It’s without question that last Monday’s opening drop of 1,100 points was an eye opener. The Dow Jones ended up losing a massive 587 points that day for the biggest point drop ever. Was it really that big of a move though? The real “Black Monday” in 1987 saw the Dow lose over 20% in a single day, which would equate to over -4,000 points today!
By the way, do you know what happens after a market correction? Since 1980, even despite intra-year drops of -14.2%, the stock market finished higher 77% of the time (27 out of 35 years). Even after that dismal Monday of 1987 the market finished up +23% one year later, +13% five years later, and +15% 10 years later. Of the 15 times we’ve witnessed a single day drop of -6% or more since 1950, there has NEVER been one time when the market wasn’t higher five years later. Of all those instances the average return after one year was +21.43%, after five years it was +10.67%, and after 10 years it was +10.43%.
We’re not out of the woods yet but keep things in perspective. It shouldn’t have surprised anyone that we finally had a long-awaited correction. What will catch many off guard, however, is that market corrections can often retest the recent lows. In this case, we firmly believe there will be more of that volatility throughout the end of summer. Lastly, don’t be surprised to see the year end positive even if it’s only in the single digit range.
See you next month!