Lessons to be Learned From the Recent Correction

Starting in early October when stocks hit new, all-time highs, the stock market entered a correction phase that witnessed the major indexes dropping by about 20% from those highs. The correction lasted from early October through December 24, 2018 – a little less than 3 months. The volatility surrounding the correction, the uncertainty, the panic, and most importantly the rapid rebound that has followed, offers some important lessons for investors.

From March of 2009 through the end of 2017, stocks enjoyed a strong bull market trend, with the S&P 500 rising more than 300% over that 9-year period. Investors who employed a buy and hold strategy – simply buying a well-diversified portfolio and holding it throughout that time-period, should have generated similar returns. A large percentage of the financial professionals who are currently working in the industry entered the profession during that 9-year period, and as a result, have known nothing other than that strong bull market trend. The net result of this investing environment is that many people – investment professionals and investors alike, have been lulled into a false sense of entitlement to strong stock market performance, year in, year out.

I have used this analogy in previous articles and blog posts, but it bares repeating – the turkey, on every other day of the year except for Thanksgiving, thinks the farmer is his best friend. The farmer feeds the turkey, shelters him, protects him, nurtures him, right up until Thanksgiving, when he chops the turkey’s head off. It is easy to become complacent – to get comfortable with our environment and to believe that everything that is good will remain good. Investing is no different – bull markets can last for years, as we have just experienced. It can become routine to generate double-digit returns year after year. Unfortunately, this never lasts, and those who fail to diligently manage their portfolios suffer the consequences.

I have been in the industry for nearly 30 years. During that time, like many industries, the financial services industry has undergone many changes. The most significant has been the proliferation of discount brokerage firms offering low commissions and fees. It is difficult to watch television without seeing a commercial for one of these firms promising to provide research and advice to help the individual investor “manage” their own investments. I saw one recently offering “expert” instruction on options trading – “… just call one of our experts and they will teach you how to trade options.”

The result of this constant barrage of advertising, over many years, coupled with the 9-year bull market, is that the average investor has become convinced that they can make well-reasoned investment decisions without the help of a professional. While there are certainly experienced investors out there that invest the time and effort in following the market, and have the education and acumen to understand, interpret, and apply that information and experience within the context of the current market and economic environments, most investors simply lack those skills and attributes. For those average investors, the most recent market correction should be a serious eye-opener.

During the most recent stock market correction, many investors working independently, without the help of a qualified advisor, were overcome by their emotions, resulting in panic selling at or very near the lowest point in the correction. Some of those, realizing their error, bought back in fairly quickly, although at higher levels than where they sold. Others, fearing even more selling and lower levels for the market, remained in cash, and thus sat on the sidelines as stocks rebounded sharply. At best, the buy and hold investors who stayed the course were fully invested entering the correction phase, and were unable to take advantage of the correction to buy stocks at the lower prices available due to the correction. Very few investors had sold stocks while the market was rallying earlier this year, before the correction, so that they had cash available to invest, and used that cash at the appropriate time – when the market was correcting, to buy stocks at lower prices.

Although it is very difficult to calculate what could have been – how much money was left on the table from missed opportunities or panic selling as described above, investors should recognize that the most recent correction offered a significant opportunity for enhanced profits. The difference in performance, for those who missed this opportunity, very likely would have paid for several years of valuable advice from a seasoned professional.

For argument’s sake, let’s say the average investor left 10% on the table by either missing the opportunity to sell before the correction and use the cash to buy stocks during the correction (a buy and hold investor), or because the investor panicked at or near the lows and sold stocks, only to buy back in after the market rebounded. That 10%, assuming a professional charges 1% per year (a typical full service investment advisory fee), would pay for approximately 10 years of professional portfolio management services (depending on portfolio value over that 10-year period of course). Investors need to ask themselves – Am I really saving money by investing my time to manage my own investments, using a discount brokerage firm, versus using a professional?

If investors take a critical, honest, and accurate look at the true performance of their investments over time, and analyze what they did or did not do during the most recent correction, and then examine what that experience – how they made their decisions during the correction and how that same decision-making process has affected and will affect the performance of their portfolio over the long-term, I believe the overwhelming majority of investors will conclude that they are far better off using the services of a professional.

Beyond a focus purely on the cost of investing (the commissions and fees), using a qualified professional offers a lot more value. There is a relationship that forms through which the professional becomes a trusted advisor, not just for investment decisions, but for those financial decisions that affect virtually every aspect of our lives. There is peace of mind knowing that you have a qualified professional managing your portfolio. When other priorities take the investor’s focus away from constantly monitoring the financial markets, like relationships, family, health, career, vacations, and the like, the professional is there watching the markets, managing the portfolio, implementing the financial plan for the investor.

Looking ahead, even for buy and hold investors, there are compelling reasons to consider using a professional advisor. Unlike the strong bull market from 2009 through 2017, 2018 saw stocks perform poorly, with the S&P 500 losing 4.4%, even including the benefit of dividends. We are no longer in a strong bull market. This means that investors will not be able to just sit back, do nothing, and generate strong positive returns. Instead, to generate returns, investors will have to employ active management strategies – essentially they will need to become successful stock pickers. Very few investors have the skills necessary to do this. Those without such skills who try to actively manage their portfolios will likely suffer some devastating consequences in the form of sizable portfolio losses.

The beginning of the year is a great time to review portfolio holdings, performance, investment strategies, and financial plans. A critical analysis of decisions made last year, and especially during the correction phase, can help investors make good decisions regarding the management of their portfolios as we move into a new more challenging phase in the economy and financial markets. A realistic assessment of the investor’s ability to actively manage their portfolio and consideration of alternatives, including hiring a qualified professional, should result in improved portfolio performance over the coming years.

I wish everyone great success in 2019 and beyond!


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