Market Correction or Bear Market
Market Correction or Bear Market
For many of you, the market downturn in the last couple weeks has brought back some fearful emotions. You were just getting comfortable again with the market and maybe even considered writing us a thank you note for encouraging you to stay invested when you wanted to get out as things were falling. But now some of those fears are back as the market has quickly dropped 10%, including a couple crazy days of volatility. You may be thinking - I don't want to go through that kind of drop that we experienced in 2008 and into 2009. We fight those same feelings and want to tell you about some research that we have studied.
Some foundation: We built our performance measurement system of mutual fund selection from a group called Sound Mind Investing. We firmly believe that no one knows where the market and economy are headed for sure, so we tweak our allocations, but continue to hold and follow the performance measurement system. So when considering an allocation change/tweak, we went back to that group and their research. Let's start with a couple definitions for clarity.
1. A "Market Correction" is when the market drops more than 10%, but less than 20%. This type of correction is quite common, with a decline of this nature happening on average every 15 months. In most cases, the move is caused by a triggering event and surrounded by fear. Most corrections are relatively brief as the triggering event is better understood or less significant than feared.
2. A "Bear Market" is when the market drops by more than 20%. This type of fall happens less frequently (only 10 in the past 40+ years) and is typically longer in duration. Most bear markets begin quietly amidst a positive feel as the market has pushed higher.
Of course, the big question is trying to determine which one you are dealing with while in the midst of it, instead of hindsight to tell you for sure. In our research, we found two ways of evaluating that have shown a high percentage of success. In addition, they align to our system of using short term performance to dictate changes. In not wanting this to be way too much information, I will spare the intricate details, but the first deals with a weekly close 15% below the high and the second compares the 10 week average to the 40 week average. If you want to know about these in more detail, call us or email us back and we will be glad to talk shop with you.
Our current allocations are still pretty conservative. With our allocations to gold, silver, and bonds, we are more conservative than normal. If however, both of these triggers were to hit telling us that a double dip recession was probable, we will let you know in another update like this and change our allocations even more to protect using an index hedge and larger short term US Treasuries allocation. To be clear, we will NOT be selling all or moving to cash, just reducing some risk exposure even more.
To wrap this up, God is in complete control and knows exactly what the future holds. We can have great confidence that he will supply all that we need, since he has promised to do so. We don't need to fear or be anxious for he is with us both on the mountain and in the valley. Following his instructions for saving and investing is the best that we can do. That is exactly what we have tried to accomplish in the system that we have developed, including this allocation change consideration. I wouldn't be surprised if this is just a market correction, but if you are watching at home, a close below 1034 for the S&P500 on a Friday could indicate otherwise.
Many of us have friends and family that have lost jobs and are trying to make decisions with 401Ks and other retirement accounts. If we can assist anyone that you know with Financial Planning or Investment Management help, we would love the opportunity to help.