The market has now entered into its first "correction" (a 10%+ pull back from recent highs) since the bull market began about 14 months ago. Painful memories are still fresh from 2008. What now? What is the correct response to a correction?First, let me say what I think is going on. As one market commentator put it today, we are experiencing a "growth fear reaction." I wrote you about this last week. The fear is that current instability in the euro-zone financial system (certain government bonds too risky) might disrupt the global economic rebound. The response is a "flight to safety," (sell stocks and buy more government bonds!). As long as fear is the dominant ingredient in current investor outlook, market fundamentals will probably be ignored.
Among those fundamentals is the global economy, which continues to rebound. Growth is accelerating, and production and trade are up, as are company earnings. Companies have accumulated cash and are beginning to spend it on long-term capital improvements. Credit is loosening. Even the residential real estate market is showing signs of stabilizing, and consumers are indicating increased confidence in their economic outlook. The fundamentals look fairly strong - and yet, we have a correction.
Corrections are normal. As a long-term investor, selling stocks into a correction makes little sense. Corrections are typically a pause before the bull market resumes. So if you are still sleeping at night, stay put and let your portfolio ride this current wave.
Yet, how do we know this is only a correction? The market is also a normal predictor of economic downturns. Suppose the fear is warranted and we are headed for another recession? This could certainly be the case. I don't think so, but I could be wrong. This is the point where you, as an investor, discover who you really are with regard to risk. The market is down, and might continue to go down some more - again.
If your stomach is getting really queasy reading this, it could be you have taken on more risk in your portfolio than you should - and this points to a real dilemma for investors. As your investment advisor, you will often hear me say two things and they might sound contradictory. I will tell you when we are building your portfolio that risk is real and you should pay attention to your reaction to it, even if fear is a part of that reaction. I will tell you that your portfolio should be designed so you can sleep at night. Then, when the market goes down, I caution you not to react in fear.
When the market is headed down, it is totally understandable for investors to get nervous. Smart, experienced investors who are appropriately invested recognize this anxiety as a usual reaction. They know risk is unavoidably associated with investing and they have accepted that risk. But some investors experience something different in a market downturn, a much stronger reaction. Sometimes, literally, they cannot sleep. If you are one of these and you are reading this, please call me. Let's discuss moving to a safer portfolio.
In the meantime, this is our response. As your investment professionals, we are investing your assets professionally, prudently and consistently in a widely diversified and socially screened portfolio of securities of companies and governments we believe present good, long-term investment opportunities. We are not trying to predict what the market will do in the near future - we are investing your assets in a sustainable economy and future that we believe is possible and worth investing in. It is a hopeful future, and an uncertain one.