Are We Due For A Correction?

With stock market prices on a five year bull run, the question that has to be asked is: “aren’t we at least due for a correction?”

Due? Yes.

Given that we haven’t even had a ten percent correction since 2012, and that the average intra-year correction since 1980 is 14%, we’d have to completely evade all historical perspective not to believe there’s one coming in the future.

However, as always, good luck to those who attempt to accurately predict exactly when prices will drop (and, more importantly, when they will rise again so you can get back in and capture the upside).

For humor, try to visualize the classic “sophisticated” investor attempting to accurately predict, and, thus “time” the market over the last six years!

Just as market price volatility (down and up) is and always has been normal, corrections are normal too and very much a part of the rational, long term, goal focused investment experience.

But, as we all know, for the overwhelming majority, corrections have historically been very uncomfortable while they’re occurring.

And, one of the biggest reasons they’re so uncomfortable is the beating of the drum by the financial media.

They’ll go to any length to reinforce that stock prices are random and irrational so you’ll stay tuned.

They love to perpetuate the myth of the common cliché: “this time it’s different”, i.e. the four words legendary investor John Templeton suggested were the most dangerous in investing.

We simply have to be on guard 24/7 to their tactics and remain grounded in what we know to be true in good times and in bad.

Temporary or Permanent?

What’s important to internalize is that market price declines have never been permanent, so when we experience our next correction, take comfort in the knowledge that it too will not last because they never have.

Specific to our current environment, the earnings/dividends/cash flow trends are far, far too strong, and the broad market’s price-to-earnings ratio is too average to sustain a large and long lasting decline.

The other factor strongly against a meaningful, long term stock market decline is cash!

Consider these two facts: at the end of the most recent quarter, Warren Buffett’s Berkshire Hathaway reported over $50 billion in cash on its balance sheet, something they’ve never had before.

Private equity is also estimated to be holding $1.165 trillion (with a “T”) in cash at the end of July.

Is there any chance that they’re just waiting for buying opportunities from irrational traders and speculators who get spooked by every short term correction and sell low?

What Can We Learn From This?

I don’t want you to internalize all of this and conclude that a correction is not in our future.

I want you to walk away knowing that corrections are normal, inevitable, and temporary, and that you have no rational reason to fear one if you’ve done your homework and you have your holdings properly allocated.

The longer I’m at this, the more convinced I’ve become that market volatility is completely irrelevant if you are a long term, goal focused, well diversified investor.

We’re all in the business of owning assets that will help us overcome the inevitable erosion of the purchasing power of our income (due to inflation).

In good and bad markets, we can’t afford to get distracted and lose sight of this.

Committed To Your Relaxing Retirement,

Jack Phelps

The Retirement Coach

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