A market correction?
Yes! But from what level?
Concern over a downturn in the markets is a hot topic these days, and the subject of much discussion in the media. But how abnormal would a decline be? The US market only experienced a 2.8% drop to date in 2017. The only previous year in which a lower dip was recorded was 1995 at 2.5%. That said, what would be a “normal” decline over the course of a year? We’re not talking about the final figure at the end of the year here, but rather about the biggest one-off decrease during the year. To find out, we looked at all the downturns that have occurred since 1929, always within a calendar year. Then, to avoid distorting the average value of these declines, we eliminated the dramatic drops that took place in 1929, 1930, 1931 and 2008. The average decline during a given calendar year came out to… -14.9%! Once again, this represents the average drop over a one-year period, not the final result – that’s positive most years!
So what conclusions can be drawn from this exercise? There would be absolutely nothing abnormal should the market drop anywhere from 5% to 10% before the year’s out. The question is: from what height?
Stay the course. If you’re losing sleep over a potential market correction or if you simply want to be more prudent, you could increase your cash weighting to approximately 10%-15% of your overall portfolio. Then, if the markets do drop, you can buy in at a better price. And should the market gain, say, 25% before the next downturn, you will have at least left a good portion of your portfolio to grow.
The Claret Team