As the market climbs higher, investors are worried about a correction. Just because stocks go up, does it mean they must come down? Of course, stocks fluctuate daily. They rise and fall as they react to reports or headlines or opinions. Since 1970, the S&P 500 has finished a calendar year in positive territory 82% of the time. Over the past 50 years, the index has been up 41 years and fallen nine. The average gain was 18.5%; the average loss was 15%. And, year-to-date, it’s up 9.90%.
During the same time frame, there have been seven bull markets with an average gain of 294% and an average duration of 77 months. There have also been nine bear markets with an average drop of 32% and an average length of nine months.
If you are worried about a stock market correction, then consider adding bonds to your portfolio. In the chart below, the S&P 500 fell 31% last March. Let’s compare the all-stock index to three different globally diversified portfolios.
- The seventy portfolio is 70% stocks and 30% bonds and cash. During the COVID correction, it fell 26.5%, or 14.5% less than the market.
- The sixty portfolio is 60% stocks and 40% bonds and cash. During the COVID correction, it fell 23.5%, or 24% less than the market.
- The fifty portfolio is 50% stocks and 50% bonds and cash. During the COVID correction, it fell 19.5%, or 37% less than the market.
By November, the market and all three portfolios recovered their losses and were profitable for the year. The index is 100% stocks, so it makes sense it fell further and recovered faster than the globally balanced portfolios.
Regardless of your risk tolerance, a hefty allocation to stocks can give your wealth a boost. Do not let short-term pain get in the way of long-term gains.
April 14, 2021
Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.
Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.
 Dimensional Fund Advisors 2020 Matrix and YCharts