The stock market took a breather just a few days ago after more than five months of historic gains. However, many investors missed out on these gains. They tried to time the market, but feared a repeat bear market in 2022, so they pulled out in October 2023 during the regular 10% correction period.
Today, the market appears to be entering a new correction phase after a significant rally. While this may be a concern, it is important to remember that on average 5-10% corrections occur each year. This is a normal part of a healthy market cycle.
This image perfectly compares the current fix to what we saw last summer. It's interesting that while the typical 5% correction of recent days has been hyped as the next market crash, the media has barely mentioned one of the strongest bull markets in history. Classic behavioral finance in action.
Don't panic during market downturns
However, let me assure you that this is completely normal. Here's a secret. Markets can go down from time to time. It's healthy! If it just goes up, there's no risk or reward. There's nothing like extra returns or alpha that makes the stock market the best long-term asset class (if you're patient). Decline is necessary, whether frequent or infrequent.
As the title suggests, the difference between winners and losers in the market comes down to investor behavior. What matters is how you respond to these low moments.
The chart above reveals all the corrections that hit the market since the deepening of the Great Subprime Crisis in March 2009 until the end of the bear market in 2022. Remarkably, over the past 14 years (on average nearly two corrections per year), the market has weathered an astonishing 27 corrections, ranging from small to large.
But here's the important point: Despite these downturns, the market performed impressively overall, surging more than 620%. However, this growth has not been smooth sailing and has been accompanied by moments of correction.
Election years are generally bullish
Election years historically have a positive impact on the stock market. However, even during these bullish periods, corrections, both large and small, can be expected. The past year's average adjustment rate for the S&P 500 presidential cycle is his 13.07%.
Market timing is a recipe for disaster. As Howard Marks points out, he needs to make two perfect decisions: when to exit the market and when to re-enter the market, which is nearly impossible. Lack of patience is also an investor's enemy. Investing for 1-3 years is speculation, not investment. A minimum of 10 years is critical to success. History and statistics support this, with shorter time periods significantly increasing the risk of loss.
It's important to understand the risks. Investing in stocks always involves the possibility of significant declines (-20% to -40%). If you can't stand this drop, consider safer options like savings accounts or short-term bonds.
Don't forget that “bullish people make money.” Permabears may seem smart in the short term, but history has shown that they often miss out on long-term gains. Look at John Hussman, who has consistently sought the high-priced market. He's seen crashes like the dot-com bubble, but he's also missed out on massive bull markets. The chart clearly shows that the market (red line) has consistently outperformed his bearish calls (blue line).
Investing is a marathon, not a sprint. Focus on long-term strategies and avoid the pitfalls of market timing and impatience. Accept volatility as a natural part of the process and remember that even a broken clock will get you right twice a day.
I'm not a total optimist, and in fact, I've been advocating caution on my Telegram channel for the past few weeks. You should avoid excessive risk exposure and consider tactical portfolio adjustments.
Frankly, it's not my style to sell everything or predict impending collapse. At the end of the day, I want him to be on the market for at least another 20 years, health permitting.
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