Monday February fifth the Dow just happened to experience the largest point loss in its history, as anyone who has had an even cursory access to media this week knows. It's been all over the news and much of the narrative that was being pushed was of course on the doom and gloom side of life. It makes for better headlines and sound bites, even if it's not accurate. The narrative over here is a bit different; the headline over here is opportunity.
The drop was certainly the largest in the Dow's history but the Dow is at its highest historically and what is not being mentioned was that in terms of percentage it doesn't even reach the top twenty. The twentieth largest percentage drop was 6.98%, which was on September 29, 2008 by the by, while Monday's drop was only 4.60%, well within a normal range. The market has tended to have a sell off of around 14% around every twenty months over the last seventy years, a market correction, which the market really hasn't seen in over two years, it's past due. The majority of signals around point to a healthy market and a healthy economy, with nothing indicating a downturn anywhere on the six to nine month horizon. Worth noting as well is that just because the market has a large sell off does not mean the economy is heading into a recession, in fact this has happened fairly recently when the S&P 500 saw losses of 12% and 19% in 2015 and 2011 respectively.
Should you be worried about further drops? Absolutely not, for one thing part of the reason that portfolios are diversified is to protect against downturns, different products react very differently to the varied stimuli that is the economy. A properly diversified portfolio prepared for market corrections allow for prime moments of opportunity. While diversified portfolios can look a lot of different ways depending on your needs and your risk profile, having a properly diversified can mean having cash on hand for these moments of opportunity. Many folk feel the need to be fully invested when invested or fully out when nervous, that's not the case over here. There is always an opportunity to pick up a stock or fund that may be off not but which indicators tell us is going to eventually pick up, market corrections offer this on a much wider scale. While corrections can make a lot of people nervous they really are a huge boon to your portfolios potential.
Speaking of the importance of portfolio diversification why don't we check out this piece from MarketWatch, "XIV trader: ‘I’ve lost $4 million, 3 years of work and other people’s money" Investors with XIV in real terms are short S&P volatility future, it's a derivative of a derivative and while the potential upside is large the downside can be devastating. We typically stay away from high risk products like this for our clients, preferring educated buys to gambling, if we were to buy though it would be a small percentage of the portfolio. The investor in the post had the vast majority of holdings in XIV and is now out almost $4,000,000.
Patience, research, diversified portfolios, and patience are all core to successful investing, especially patience. No matter how much research is done there is no predicting the future market fluctuations, there are only indicators as to what is likely and the patience to catch the right wave. The current sell off has so far stayed and should continue to stay in a healthy range, and as such we're monitoring for opportunities. We'll be reaching out over the next few weeks to discuss what's happening and our plans for it, but if you would prefer a meeting please don't hesitate to reach out to us, especially if there have been any life changes that would change your goals.
Sources: New York Times, CNBC, Thomson Reuters.