We previously looked at this chart in the fall of 2015 when the stock markets were down a few percent for the year. Our message back then was that it is typical to see the stock markets down at one or more points during the year. Moreover, the stock markets are very capable of recovering from intra-year declines.
Fast forward to present day. I think the chart again illustrates another timely point. The most frequent questions we are getting are, “Is the stock market forming a bubble?” and “Should we get out of the market because we keep hitting all-time highs?”
While we remain optimistic regarding the stock markets, I’m not going to make any bold predictions about what the rest of the year holds. Every investor is in a different phase of life with different goals and risk appetites. What I will say is that if we do get a correction in the stock markets, I don’t believe it is because the stock market is overvalued or in a “bubble.”
The chart illustrates that we get a pullback in the stock markets nearly every single year, during both good and bad years. We have yet to really experience that this year. So if/when it happens, it should not be cause for panic due to the stock market “bubble” bursting. It very well could be a buying opportunity depending on the circumstances surrounding the pullback.
The chart clearly indicates long term investors shouldn’t overreact to short term volatility. Every investor is different, and it is important for you to discuss your investments and allocation with your financial advisor to determine the appropriate course of action. Many times the biggest “change” you need to make with your investments is nothing at all.
We have also written about the dangers of trying to time the market. It might be a good time to review that blog, The Importance of Staying Invested.