“A correction is coming! A correction is coming!” So is Christmas.
The Standard & Poor's 500, often abbreviated as the S&P 500 or just "the S&P", is a stock market index based on the market capitalizations of 500 large companies having common stock listed on the several American stock exchanges. The S&P 500 differs from other U.S. stock market indices, such as the Dow Jones Industrial Average or the Nasdaq Composite index, because of its diverse constituency and weighting methodology. It is one of the most commonly followed equity indices, and many consider it one of the best representations of the U.S. stock market and a bellwether for the U.S. economy. Below is a chart of the monthly closing of the S&P 500 since its inception in January 1950. The S&P 500 stood at 16.66 at the end of its first day on January 3, 1950 and 2,431.77 at the end of the day on June 9, 2017.
Over that 67.4 year period the index has grown at a 7.7% annualized rate, not including dividends. During certain periods of that time, the index grew faster than 7.7 % per year but was unfortunately offset by periods when the index fell…and fell quite rapidly. So the market goes up and the market goes down - but more up than down. Several years ago a client showed me this chart with the two downturns and said that he was planning to stay out of the market until the next downturn when he would buy in at the dip. I asked him, “How do you know there will be another dip like the two on the chart?” He responded by saying that if there were two dips there will most certainly be another dip at which point he would buy in. I then asked him, “How will you know when you are at the bottom of the dip? The only way to tell you have hit bottom is looking backward from a higher place.” He had no answer for that. The investment landscape is littered with the bleached bones of investors who thought they could time the market. The Efficient Market Theory says that information is transmitted through the market so fast that it is impossible for an individual to consistently beat the market. Some people hit it just right out of luck, and people hit it wrong out of luck. The only thing for sure in that chart above is that the market is upward trending. A correction will undoubtedly come, but no one has been able to predict exactly when or for what duration. The history of the stock market is that “this too shall pass”. I asked Riley, the Golden Retriever with whom I share my office, what she thought of the possibility of a correction and trying to time the market. She looked at me and then started to lick her paw. Ah, Riley, you don’t have a watch so you can’t time the market. Smart. So we will continue to buy and hold. After all, if Warren Buffett is a buy and hold kind of investor, the strategy cannot be all bad.