Why is it when the market moves up the media uses phrases like – “the market moved up today” or “the broad index was higher” yet when the broader markets move down the exact same amount we see phrases like “market plunges” or “mini crash”? The reason is that the media knows that these things will draw us in. Volatility refers to both up and down days – not just negative ones– and is a part of investing. While each market correction is unique, the media’s reaction is usually pretty consistent—sound the alarms! Ultimately market pullbacks happen relatively frequently for a variety of reasons and should not alter a well-designed goal-based financial plan.
In 2013 we had an extraordinarily strong year. Since 1926 there have been 17 years where the Dow Jones Average was up 30% or greater – as was the case in 2013. Historically, in the year following the 30% gain the market experienced at least a 10% correction 88% of the time which is @ 1,645 points today. 100% of the time there has been a pullback of 6% – roughly 1,000 points today – or more (Raymond James equity research).
Over the last 50 years (i.e., 1964-2013) the differential between “up” and “down” days for the Standard and Poors Index is 53% “up” and 47% “down.” For calendar year 2013 this differential was 58% up days and 42% down. Fluctuations are a healthy part of long term market performance.
We believe that if an investor is putting money into the equity market it should be earmarked as long term and one can expect both up and down days. Money that you may need in the near term should not go into equities and therefore the fluctuations should typically not matter. So the next time you read, see or hear some dire headline about the latest Armageddon you can rest assured this really is nothing new or unusual. As always please contact your financial advisor with questions or whenever we may be of service.
Source http://www.standardandpoors.com/home/en/us . The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the US stock market but which individuals cannot invest in directly. All S&P 500 returns provided in the commentary calculated on a total return basis. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete The Dow Jones Industrial Average is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. Individuals cannot invest directly in an index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Past performance does not guarantee future results. Any opinions are those of Randy Carver and not necessarily those of Raymond James.