What Will Happen

May 4, 2015

 

You know us at Savant – we typically claim that we cannot predict the future. But we’re going to surprise you today – there are a series of events that definitively WILL happen in the future. Those events are:

 

  • There will be a market correction, meaning a decline in values of U.S. stocks by at least 10%

      • The financial media – particularly those on the internet – will, with increasing frequency and hyperbole, comment on the decline (more on this below), and warn investors about the risks of investing

      • Some investors will react to those comments, and sell their positions, locking in the losses they incurred

       

       

      We can be really specific about the structure of those commentaries that you’ll read and hear. They will quote the degree of the decline in “points” (instead of percentages), and provide perspective on its historical relevance – such as, “over the past 9 months, the Dow declined by 2700 points. It has been the third largest drop in the 250 year history of the market.” Wow, that sounds frighteningly unique.

       

      How can we know these things? Because market declines are inevitable – there will always be changes in economic conditions, corporate profitability, and investor sentiment that will cause sharp movements, both up and down, in market values. And the only thing more inevitable than market declines is the overreaction by the financial media to those declines. During periods of change, muted, calm analysis does not capture as much attention as exaggeration, whether the topic is finance, politics, or foreign policy. Commentators who want people to read their analysis understand this.

       

      Here’s what the commentators won’t do. They won’t use percentages instead of points because if they used percentages, the historical proportion would seem much smaller. There have been dozens of 10% declines in the markets history, and a 2700 point drop only seems rare because until the late 1980s, the level of the Dow Jones Index was never above that level. A 2700 point drop in 1985 would have been really historic, because it would have defied the laws of mathematics (it’s impossible to lose more than 100%). Also, the commentators won’t tell you that after every market correction in the past 80 years, investors who did not sell their positions were better off 10 years later than investors who did.

       

      Now that you know what’s going to happen, we’ll tell you where our crystal ball gets a little foggy. We know the “what” – we just don’t know the “when.” If we knew the market was going to begin a steep decline tomorrow, we’d make some different decisions about your investments. The correction might happen soon, or it might not happen for another five years (perhaps after stocks double in value). Because we never know the “when,” we remain disciplined stewards of your capital and do what makes sense for the long-term, which is to put your money in a broadly diversified portfolio.

       

       

       

       

       

       

       

       

       

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