Market Corrections: Anomaly or Reality?

It’s hard to believe that I’m approaching my 15th anniversary as a Wealth Advisor this spring! It’s been quite a ride. Over that timeframe we’ve experienced two bear markets: the Great Financial Crisis and the initial Covid shutdowns. Both were very different, and stressful times. These are the obvious market drops many remember in hindsight. They are big drawdowns, and in the case of the Great Financial Crisis, it took years for markets to fully recover. 

Maybe less well known is that January 2022 is the 18th correction of more than 5% in the S&P 500 that I’ve experienced in my career. That’s more than 1 per year!  

Let’s dig a bit deeper (all data as of February 3rd 2022):

Source: Slickcharts: S&P 500 Total Returns & Yardeni Research: S&P 500 Bull & Bear Markets & Corrections

Pretty remarkable, right?  During my career there have been 18 pullbacks of more than 5%, of which eight (nearly half) have been more than 10% (official corrections), while two have been down more than 20% (official bear markets). Despite that, the S&P 500 is up nearly 300% over my career as an Advisor, and up 12 out of 15 years!

Although in the moment seeing the market go down can be scary, this is a normal process of a healthy market. It’s cliché to say, but “stay the course” has proven to be the most successful investment advice. “Time in the Market” is more important then trying to “Timing the Market”.  

As an Advisor and Portfolio Manager, most of my day-to-day doesn’t change if markets are going up or down. I’m still reviewing accounts, dealing with money in and out, reinvesting maturities, meeting with management teams of investments we own and keeping an eye on our holdings for any necessary changes. For those invested in our baskets and/or discretionary accounts, these allow us to react very quickly should a change need to be made. This has only increased as more clients have opted to utilize those solutions in recent months and years. Almost everything listed above happens behind the scenes. 

What does change when markets decline is the number of calls coming in and the number of contacts the team is making. Some of it is the usual reviews and check ins, others deal with concerns and last but not least is making any changes (not already done through baskets/discretionary accounts) to portfolios. In pullbacks the intensity is always higher as nobody wants to see their accounts decline, but this is where good habits are crucial for success!

I sit in an interesting seat where I’m a Wealth Advisor/Portfolio Manager for the team, but also a client. During market hours my focus is entirely on client money, meaning I have developed some best practices to ensure my own family’s success during market declines. With this latest pullback occurring at the start of the year I was a bit more prepared as my wife and I had completed our annual family meeting regarding our state of affairs. We discussed our cash needs and budget items for the year, went over our registered account contribution plan and reviewed our accounts line by line with a list of holdings I had on my watch list for better opportunities.   

My Best Practices:

1. Discuss cash needs with your spouse and make sure you have 3 months set side (plus prepare for large items and timing of those items)

• If you have big expenses coming, make sure you have them covered.
• I don’t want to sell when things are down. 
• If I have extra funds, I want to take advantage of the sale!

2. Automate My Savings

• I automatically contribute and buy mutual funds every month a couple of days after pay days.
• This helps in several ways:
  • I max out the important accounts (TSFA/RSP) every year.
  • I’m not sitting in cash earning 0%.
  • I buy on the way up, or the way down, the key is buy!
  • I’m mostly talking to clients about their investments, so I don’t have to worry about missing market closing times for my personal accounts.

3. Sell My Losers

• Not all investments work out. Its easy to anchor, and hope for a better price, but I prefer to sell and move to the baskets so I’m taking advantage of our teams’ best ideas. 
  • Full disclosure I did just this Friday Jan 21st in the final half hour of trading for the week.
• I keep a watch list of names I want to buy AND sell.
  • The sell list has 5-6 names. To fund the basket purchase I sold 3 of these (the others remain on the watch list).

4. Take a Long-Term View – The Most Important One!

• Its easy to fret about short term market moves. 
• If my wife lives to her average life expectancy, our funds will be invested for approximately 55 years. Looking back 50, 30, heck probably 5 years from now I will have entirely forgotten about what happened in the markets today, just like in the above where I’d forgotten about 15 of the 18 declines during my working career in this industry!
  • Important Caveat: Your personal situation may mean you’re on a different time horizon. For example, if I was building a house the recovery window is much shorter to recover and I will likely remember the decline!

5. Add Extra Money

• From 1980 to 2020 (a bit longer than my life) about half of the years have had a drawdown of 10% or greater. However, only 6 years (or 15%) have had drawdowns greater then 20%. Yes, it hurts to buy and watch something decline but its better to buy then miss.