Selling pressures usually stem from two forces. One is a temporary correction that may occur in the context of a continuing and lasting bull market. The other is a more lasting bear market.
So how do you know which type of decline it is? And when it will happen?
The timing is near impossible to predict.
No one knows when a correction will set in. (All those “experts” who say they can? Forget it. If they really knew, the last thing they would do is be telling you.)
Researchers say that in the postwar period, the S&P 500 has dropped 15% or more on 16 occasions. Half of those declines were relatively mild, lasting less than eight months (although we bet that 8 months seems like a very long time to most clients!)
Major pullbacks lasted longer, about 17 months, and experienced drops of more than 30%. Those big declines were normally associated with full-fledged recessions.
For what it is worth, researchers right now are not forecasting a recession.
That suggests that you should stand fast and not cave to selling pressure during these extreme market drops we’re seeing lately.
Yes, we know that is hard to do. It’s human nature to want to “take action” and “do something,” which usually means wanting to sell.
But that’s usually the worst thing you could do. Our job, as your advisor, is to urge you to put the emotion aside and make rational decisions about the market. That’s what we are trained to do, and how we can help you make better decisions in times of stress and market volatility.
“Regardless of market conditions, there is a natural human instinct to make portfolio adjustments based on what one thinks will happen,” say market researchers. There’s only one problem with that. That same research shows that what you think will happen is a terrible predictor of what will happen.
With hindsight, we do know that in the overwhelmingly majority of time periods, you would have done much better by standing pat, not selling, and not making portfolio changes, even during tumultuous periods.
So don’t be your own worst enemy. When the market rollercoaster gets to you, do the smart thing. Turn off the TV, and head outside for a walk.