Frederick Fisher: Don’t fear a correction, take advantage of it
It has been almost 10 years since the market crash of 2008.
Since that time, the S&P 500 has gone from the market bottom on March 9, 2009 of 676, to a new record of 2,500 as of close of Sept. 15, 2017, an increase of 370% (Yahoo! finance).
During that epic rise, the market has, according to Yardeni Research, had multiple downturns averaging 10 percent and happening about one per year or so. Each correction, according to the Motley Fool, lasts less than 90 days.
However, when they happen, clients get nervous and will call our office wondering if we should make any changes.
Consider a hypothetical client that we will call Roger Dodger.
He contacts his financial advisor during the market correction in the fall of 2015.
His plan is to retire in the next three to five years and he wanted to make sure he was properly allocated from a risk standpoint, because he could not afford to go through another market crash like 2008/09.
His advisor explains to him that they were experiencing a market correction and that they are normal and common, and that there is no reason yet to panic. He explains five things about market corrections.
The first is to define a market correction vs. a market crash or bear market.
A market correction is any downturn that has an index fall 10 percent or more. A bear market happens once the index falls 20 percent or more.
The second thing his advisor tells him is that corrections happen often, approximately once every year or so.
Third, they do not last very long, approximately 60-90 days.
He then explains that before the crash of 2008, we had not had a correction if four years. The factors leading up to the crash were many — not having a regular correction for that long of a time may have been one of them.
He goes on to explain that a correction creates an opportunity to review his allocation and see if any adjustments need to be made. They review his allocation and discuss in more detail his plans for retirement and his expectation for income.
Based on his input, his advisor recommended that it would be a good time to add to his stock portfolio, now that prices had come down from their highs and could be considered good values.
Since he was not planning on retiring for five years, he should be able to see some growth buying at these levels.
Then his advisor explains that corrections can potentially create opportunities, including being able to buy investments that may be undervalued.
His advisor also lets him know that the most worrisome attribute of corrections is that they are unpredictable, and the only way to mitigate this risk is to monitor one’s investments and adjust allocations as necessary.
His advisor reminds him that when the market was peaking a few months before the start of the correction, he had advised that he trim some of his positions, just in case a correction hit within the next few months.
At that time he had wanted to do some maintenance on this house, so they sold $10,000 from his account so it would not be at market risk.
In the end, they decide to hold the course and ride out the correction.
If you are concerned about another correction, just remember this may be a good time to review your portfolio and make some common sense changes, based on your short and long term goals.
Frederick Fisher is a Certified Financial Planning Practitioner, and insurance agent with Ostrofe Financial Consultants, Inc. Advisory services provided by Ostrofe Financial Consultants, Inc., a registered investment advisor. The opinions voiced are for general information only. They are not intended to provide advice or recommendations for any individual and do not constitute an endorsement by NPC. Ostrofe Financial Consultants, Inc. and NPC are independent and unrelated companies. Please consult with your representative to confirm on which company’s behalf services are being provided. For questions or suggestions, contact Rick Fisher at 530-273-4425, or email@example.com, or visit ostrofefinancial.com. Branch address: 565 Brunswick Road, Ste. 15, Grass Valley.
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The MEME stocks are on fire again. You remember these. My last article on the MEMEs was the called “The Game that is Gamestop.”