Every market has regular pullbacks and consolidations. Since the market made its lows in March 2009, it has had nine corrections from more than 6 percent to almost 22 percent, beginning with a 9.1 percent decline five years to the day from tomorrow.
If these are a normal part of any market cycle, why do we fear them? Like the change of seasons, we should accept them as simply inevitable. Instead of fear, consider making preparations so that when the inevitable comes, you have a plan. The alternative is an emotional reaction -- and that's never good for portfolios.
As we have detailed far too many times, people are terrible at making predictions. You draw conclusions from a single data point. You don't know what the economy is going to do, or where interest rates are going. You can't even forecast your own behavior.
Forecasting the stock market is even harder. Yet people constantly try to time the market, pick the exact points to jump in and out. No one does this especially well, and that is before we consider costs and taxes.
Be aware of when you are letting predictions slip into your process.
Decide that a correction or crash is coming, and you will begin to see more and more evidence confirming that expectation. This is classic confirmation bias, where we find what we are hoping or expecting to see. Not only that, but we give it undue weight in our mental models, and we remember it longer and more clearly than the data that contradicts our expectations.
Confirmation bias doesn't only affect bears; the same is true for bulls. Believe that the rally or economic expansion will continue and soon after, everything you see will support that thesis. Shopping centers are very busy (bears see nobody carrying packages), restaurants are full (especially the cheaper ones, note the ursines), and of course, the market keeps reaching new highs (on less and less volume).
It's important to understand our own tendency to look for confirming evidence, rather than seeking to disprove our thesis. It is a problem inherent in human wetware.
Just because corrections are inevitable, doesn't mean you should be complacent.
For investors, anyone with a longer-term time horizon should look at a correction as an opportunity. Use any market decline to rebalance adding to those asset classes that have fallen. Review your portfolio, looking for holdings to trim or eliminate beforehand.
Investor changes, unlike those of traders, should be far more incremental. Less is more when it comes to making alterations to well-thought-out plan.
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The views expressed here are that of myself or the cited individual or firm and do not constitute a recommendation, solicitation, or offer by myself, D2 Capital Management, LLC or its affiliates to buy or sell any securities, futures, options or other financial instruments or provide any investment advice or service. D2, its clients, and its employees may or may not own any of the securities (or their derivatives) mentioned in this article.
The Jacksonville Business Journal has ranked D2 Capital Management in the top 25 of Certified Financial Planners in Jacksonville. The Firm is also a member of the Financial Planning Association of Northeast Florida, the Jacksonville Chamber of Commerce, the Southside Businessmen's Club, and the Beaches Business Association.
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