By: Gary Droz
In the kind of bull market we’re experiencing, I get the same question from nearly every client: when do you think we can expect a draw down? While I cannot see the future, as an advisor I have the tools and team to provide you with my best assessment.
The market has been in a perpetual upswing for several months, which makes a draw down likely in the near future. While a correction is a normal element of the market cycle, it nevertheless creates a sense of unease in many investors. Drawdowns of approximately 5-10% are common in any market cycle, often times occurring multiple times within the same calendar year. It might surprise you to know that since 2009 the S&P 500 has had 24 drawdowns of more than 5%, which makes it easy to believe that a draw down is likely inevitable, especially considering the S&P 500 has climbed higher for nearly 244 trading days without a 5% or higher pullback.
The last drawdown of more than 5% occurred on June 27, 2016. If one occurred today, it would be the longest duration without one since 2009. If one doesn’t occur until August, it would be the longest period in 20 years. Based on these numbers, it’s impossible to think that a drop in the market is anything but imminent. But as an investor how should that change your behavior? Provided you have crafted a diversified investment strategy that takes into account your personal objectives, goals and risk tolerance – it shouldn’t change your behavior at all.
It is important to understand that the likelihood of a drawdown should not alter your basic investment approach or asset allocation. Provided you are comfortable with the volatility of your portfolio, it is important to be consistent. If you refer to this 20 Year Rolling Chart, you can see that the 24 drawdowns have not altered the basic upward trajectory of the market (as measured by the S&P 500), which has demonstrated performance of approximately 8-9% over the last 28 years – including the meltdown of 2008. Time has a remarkable way of “smoothing out” these periods. Whatever your allocation, whether it be conservative or aggressive, it probably makes sense to stick with it and let the allocation work for you.
All investing is subject to risk, including the possible loss of the money you invest. Past performance is not an indication or guarantee of future results. Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of investments will meet your investment objectives. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.
Opinions expressed are for general information only, are subject to change without notice and are not intended as investment advice or to predict future performance. Consult with your financial professional about your individual situation before making any investment decision.