On Friday, the S&P had slid 10% from its high. What does that mean for you and your portfolio?
On July 31st, the market was at 4,589. On Friday, it was 4,117. Today* it’s actually bounced back a little bit. Whenever the market drops 10%, we seem to forget the fundamentals. Now is a good time to discuss what this in fact means.
Let’s start from a historical perspective. When we build an asset allocation, it is designed to stand the test of time. It is not designed to identify when the market is going to move. We’ll talk about later why that’s such a difficult challenge. It’s always important to acknowledge the emotional component. When we make decisions based on market moves, we have now migrated from long-term investing to emotional investing.
We need to keep in mind we have a diversified portfolio and not all asset classes are impacted equally by these market moves. The expert consensus is clear -studies advocate staying the course. The challenge with pulling out of the market is if you miss 10 top-performing days in any given year, over time, you cut your returns in half. This is because market returns are lumpy. There’ll be a little run-up and everyone would get back in and it’s already too late. The run-up’s over.
Market timing is devilishly difficult, not only because you have to figure out when to get out, but also you’ve got to emotionally and tactically figure out when to get back in. Normally, that’s after the recovery has already kicked in.
I like to look at these events as an opportunity. The way we’ve set up our rebalancing is when markets move a certain percentage, we go shopping. I’m sure when groceries are on 10% sale, everybody goes to the grocery store. The markets are on sale today. We’re going to be rebalancing. Don’t forget, the real threat to your wealth is inflation and taxes. Equities are still the best long-term inflation hedge there is.
We wish you the best of investing success.
*Monday, October 30th 2023 at the time of recording