THIS IS AN ARCHIVE POST. CLICK HERE FOR THE CURRENT TSP ALLOCATION GUIDE UPDATE.
The market caused a little bit of angst among investors this week, which generated a number of emails from fellow members of the TSP Allocation Guide community. My favorite had to be this one:
Let me start by saying that I absolutely did see this coming. I have explained the regularity of market corrections and why I don’t panic when they occur on numerous occasions since starting this blog. For example, see A Look Forward at Thrift Savings Plan Investing in 2015 in which I wrote:
As at the beginning of every year, I will confidently predict we will see four or five 5% corrections, and probably a 10% correction at some point (because that happens pretty much every year). With history as a guide, I am convinced the timing of those corrections isn’t predictable, and that the market will recover and move higher in each case within a matter of weeks.
What we are seeing right now happens routinely and is inevitably followed by a resumption of the market’s upward trend. This is what markets do. The stock market, on average, has a correction every 357 days, so pretty much once a year. Our last correction was nearly 1,000 days ago, the third-longest streak on record, so we were well overdue from that perspective. Over the past 35 years, we saw an annualized average drop of 14.7% (see the red dots in the chart below), but the market finished the year in positive territory in 27 out of those 35 years. And we aren’t even close to the average: – Friday’s S&P 500 intra-day low of 1,970 represents a 7.6% drop from its intra-year high of 2,134, so this correction would have to double just to hit average.
Of course in the very next paragraph of the post I referenced above, I talked about the potential risk posed by a Chinese financial crisis. I don’t think that is where we are at this stage, but even if China doesn’t completely melt down it can obviously still do some damage to global markets.
You will forgive me for doing some cutting and pasting from an earlier post (May 2014), but this is a routine enough event that I have covered it in the past:
Bull markets end when the economy enters a recession. In the history of the modern stock market (since 1966 for today’s purposes) there have been nine bull markets, including the one we are in now. Seven ended when the economy entered a recession. Not because they got “tired” or any other nonsense the communications majors on TV spouted at the time. (No offense to communications majors in other fields – you are doing fine work!)
The solitary exception was the crash of 1987 when the market had the largest one day drop in history on October 19. That was an outlier because the economy had not entered a recession. The crash was caused by a number of unrelated factors which combined to create a short term panic. The market had been on a tear and was up 44% in the first seven months of the year. It was due for one of those five or six corrections which happen every year (which I write about nearly every month). The crash started with the bottom dropping out of the Hong Kong stock market, that spread to the European markets, and then the US market followed. It likely would have been a fairly normal correction in the 10% range (we average one of those per year), but computerized program trading had recently been introduced in the US stock markets. These trading programs were rudimentary at that stage, and didn’t handle the correction well. At a certain point, the algorithms all had a “sell everything” fail safe which executed when the market fell to a certain point. That started a panic, market psychology took over, and the market fell over 22% in a single day.
But what happened next is instructive. The economy was not in recession, so the new bull market started immediately. The day after the crash was the largest point gain in the history of the stock market. And a few days later on October 22, the market crushed that record by 150%. At the end of the year, the S&P 500 was still up 5.2% for the year, and all of the crash’s losses were wiped out in less than two years. Not a great period, but nobody’s retirement accounts were wiped out by the crash except for those who were so frightened that they sold at the bottom and missed the recovery.
When the market is down for a few days in a row, I look at all the red and wonder if there wasn’t some way of predicting these events too. But because I know where we are in the economic cycle, I don’t lose any sleep and I don’t ever consider selling. If I bothered to check, I’m sure that in the last week I have “lost” well over $100,000 in my Thrift Savings Plan and brokerage accounts – but because I didn’t sell anything, I haven’t lost a penny. And over the past few years I have “gained” many times that amount by staying in the market and ignoring corrections. So when these events occur I shrug my shoulders and go looking for stocks I like which are on sale.
The Current Bull Market
Since the stock market’s bottom in March of 2009 there have been three corrections (I think it is safe to say we are in our fourth now). I did not sell a single share of stock during any of those corrections, and I went from being comfortable to being wealthy by most standards during that period:
- in the spring of 2010 the S&P 500 dropped 16%;
- between late April and late September 2011, the S&P 500 dropped 20%;
- in the spring of 2012, the S&P 500 dropped 9.9%.
During that same period, the S&P 500 has been up 165%. You can see those corrections on the chart below, but you can also see what the market has done after each:
Want to go back a little further? Since World War II there have been 58 market correction. The average gain in the period between corrections has been 32%.
Ignore the Financial Media
The financial media is in the advertising business, not the news business or the financial advising business. They make money when you watch the ads on TV or fall for the click-bait headlines screaming about market collapse. They very intentionally do not put these market events into context, explain that this happens routinely and the world is not ending, or tell you that professional investors use these events to buy more stocks and funds. CNBC doesn’t get you to stay tuned past the next commercial break by bringing on people who will tell you that it is overwhelmingly likely that this is a complete routine non-event, so that’s not what they do.
So where are we now?
I want to get this update out, so I’m not going to go into any depth at all on the indicators I rely on for gauging where we are in the business cycle. July’s numbers pointed towards a continued recovery in both the US and in the key markets which make up the TSP I Fund, so my allocation remains the same as it was last month: 85% TSP S Fund and 15% TSP I Fund.
The Next Update
Unless something dramatic happens (and my threshold for dramatic is obviously pretty high), I will update this post again during the second week of next month after all of this month’s data comes in. I send out a notification of these updates (or allocation changes during the month) to the email list which you can subscribe to here: Subscribe
If you want to see what I am reading throughout the month, I also have a twitter account to which I usually post items of interest which I have stumbled across for investors, Feds and the military once or twice a day at: @TSPallocation
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(There is, by the way, no need to comment on the propriety of my pen-pal’s word choice in the email I shared above. I did that because I thought it was funny, not to rally defenders. He and I have since exchanged some very pleasant emails and all is good there.)