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After an unprecedented run of continuous gains, the market has finally hit a downturn. However, we are not worried. While the widespread instinct might be to sell, we believe this would be a fundamental error. It is impossible to actually know where the market is headed. Statistically speaking, mistiming a market rally is extremely costly, meaning that if you sell now, there is a great likelihood that you would miss out on substantial gains over the long run.
Along with short term investing come a lot of dangers. According to some analysts, timing a long term bull market is dangerous. Their findings showed that the beginning and end of bull market runs generate the highest returns. Despite its actual lifespan, there is a good chance the bull market has just begun. However, even if it ends, statistics show that exiting now could hurt long term returns. Between October 1978 and October of this year, the S&P has returned 11.8 percent per year, on average, accounting for a 8,679 percent cumulative return (Sommer). This year, October actually was the worst month for stocks in seven years. There has been a slight rebound in November, but not by much. Stocks have had a moderate return thus far, including a slight bump the day after the election.
One of the main culprits would appear to be interest rates. They are disturbingly potent for stocks. Seeing as the rate of change, which has been very high, tends to drive the market, it is not surprising that the market has ran into trouble as of late. Take September for example, bond yields were reaching new highs for the year, coinciding with a downturn for stocks. This supports the idea that a rapid change in interest rates can cause a negative effect on stock returns.
The next issue deals with valuation. According to reports from The New York Times, the American market is still overvalued. Some analysts suggest that the stocks need to fall nearly 25 percent below their October 31stvalue to reach median valuation. Alternatively, stocks outside the United States are comparably undervalued. As a result, there may be opportunities in these niche markets around the world. Thus, a diversified international portfolio could bolster long term gains. This means that your portfolio should have a lower limit for stocks at about 30% of your portfolio and an upper limit at about 70%, and should include international holdings.
Following this guidance, we must remind ourselves that even if stocks continue to fall, we are purchasing them at cheaper prices. In the long run, buying stocks at low prices will generate greater returns when they inevitably rebound, resulting in a bigger payout. This is an act of faith, not only based on our history, but the history of the market as a whole. Stocks are risky, but that is why they return as much as they do. Stay in the market, buy cheap, and you will see great long-term returns.
Citations
Sommer, Jeff. “The Market’s Been Falling. I’m Putting My Money in Stocks Anyway.” The New York Times, The New
York Times, 16 Nov. 2018, www.nytimes.com/2018/11/16/business/falling-markets-investing-anyway.html.
