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Corrections: A normal part of investing

A 10% drop in the S&P 500 for the first time since 2011 reminded investors that stocks can go down as well as up. In a Money Talk Video, Marc Amateis puts stock market corrections in perspective, saying they’re something that long-term investors need to expect and to take in stride. Marc spoke with Joel Dresang. A transcript follows.

Joel Dresang: Marc, between May and August, we had our first stock market correction in four years. We’ve recovered a lot of that in the two months since, but a lot of people – even smart, experienced investors – got anxious about it. How do you calm investors?

Marc Amateis: Well, I think Joel, the first thing is investors need to understand that corrections are a normal part of investing. You know, as you said, this was the first downturn of over 10% we’ve had since 2011. That’s a long time. On average, you get a correction like that every 15 to 18 months. So, as long as investors understand that, I think that helps them to get through it when it does happen.

Joel: And we have to consider the context too, right? This was just three months, and it was just in the stock portion.

Marc: Yeah, exactly right. You know, an investor shouldn’t be 100% invested in the stock market. So, assuming they have a properly allocated portfolio with plenty of bonds in it, maybe they were down half of that – somewhere in the order of 6%. And really, an investor ought to be able to handle that. You know, a 6% decline in your portfolio isn’t any fun, but it’s not the end of the world.

Joel: Also, do you think because it’s been four years, that people needed to be reminded that the market goes down as well as up?

Marc: Yeah, I think so. And the other thing I think is that people tend to think of the high point in their portfolio. I think it’s human nature that when their portfolio declines, they look at that as a loss. But really what they need to do is look at what they’ve done over a longer term. We’ve had some pretty darn good years in the stock market. People have made some real good money over the last few years, and if you look at it that way, you realize that you’ve got a lot to be happy about.

Joel: What about retirees who see that stock market loss and then start getting anxious about – you know, that they’re going to be running out of the money that they need?

Marc: Well, they should understand they don’t need all that money tomorrow. And again, if they’re properly invested and they have 7, 8, 9 years’ worth of money in bonds to draw from if stocks go down, then they’re going to be fine. And that’s really the key.

You’ve got to be able to leave your stocks alone when the market corrects. Stocks will recover. They always have; they always will; it’s just a matter of how long it’s going to take. So, if they can leave their stocks alone during a downturn and give them a chance to recover by leaning into their bond part of their portfolio, they’ll be fine. Don’t go and change your lifestyle just because you have a normal market correction.

Joel: What about younger investors? What’s the message for them?

Marc: Well, I think the message for them is a correction like that can be a good thing. Given a long enough time horizon, if they’re dollar-cost averaging into a 401(k) plan, for example, when the market goes down, they’re buying more shares at a lower price. And they don’t need the money for another 30-35 years. So that gives them an opportunity to do well. As long as they’re disciplined, they stay in the market, they continue to invest according to a disciplined plan, that can be real positive.

Joel: What are your expectations for stocks in the near term?

Marc: Well actually Joel, I think stocks look pretty decent right now. You know, if you take out the energy sector, corporate earnings are pretty good. We have a low interest rate environment. It looks like that’s going to continue for some time. That’s good for stocks. So, I think the big takeaway is investors should stick to a well-designed plan and not get overly concerned about this correction.

Joel: So, bottom line, long-term investors with a diversified portfolio don’t really need to worry much about stock market corrections because it’s just part of the game.

Marc: Exactly right. I mean, the long term historical average for stock market returns, depending on the indexes and the markets you look at, somewhere around 8% or 9% a year. So, if you look at it that way, even through all the corrections, that’s what you ought to be able to expect over a lifetime. And again, if you stick with a disciplined plan, understand that that’s part of the deal, corrections are going to be part of investing, then you’ll do very well.

Marc Amateis is vice president and an investment advisor at Landaas & Company.

Joel Dresang is vice president-communications at Landaas & Company.

Money Talk Video by Jason Scuglik and Peter May

Learn more:

Market corrections: Always be Prepared, a Money Talk Video with Brian Kilb and Marc Amateis

Weathering a stock market correction, a Money Talk Video with Bob Landaas

Diversification vs. uncertainty, noise, a Money Talk Video with Marc Amateis

Market Risk: What You Don’t Know Can Hurt You, from the Financial Industry Regulatory Authority

(initially posted Oct. 30, 2015)

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