As you open your account statements and see your balance go up month after month you breathe a sigh of relief. But, then your next thought is – can the market keep going up like this? When will it end?
It helps to recognize that every market has pullbacks and that they are a regular part of stock market behavior.
Volatility does not imply the direction of the stock market. Instead, it’s the price we pay for a higher return in the long run.
We are currently in the 9th year of a bull market that started on March 9, 2009. In a few months, it could be the most extended bull market in history. However, it hasn’t all been up, up, up. There have been five corrections (market drops of 10% or more) and many smaller dips since 2009.
Second, it helps to recognize that market corrections are unpredictable. Realizing there will be a pullback doesn’t tell us when or help us maximize returns. If we cash-out today, we are just as likely to miss another year or two of upward movements as we are of sidestepping the next downturn. In result, our long-term financial plan may get derailed.
Third, recognize now that the next unpredictable correction will look obvious in hindsight. The reality is that even the most seasoned of investors can’t accurately predict stock market direction. Why? There are many events that can cause stocks to drop that are unpredictable themselves – from terrorist attacks to civil unrests, to a sudden change in economic policy.
Finally, realize that corrections are healthy for long-term bull markets. As stocks get close to full value or overvalued, it makes sense that prices will fluctuate to a more reasonably priced range. This leaves the door open for buying stocks at better prices and more gain in the future. Sometimes taking no action is the best action.