With a volatile third quarter now ended, it may be helpful to offer some historical context for the recent market declines. Since the financial crisis in 2008, stock prices have had only one substantial period of decline (approximately 20%), in 2011. Since this has been a long period of generally steady stock price increases, it is perhaps reasonable to point out that stock prices are “due” for some declines. Interesting historical statistics were presented in a recent article in Investment News magazine (9/14/15, page 3), which advocated a buy and hold approach to price drops, rather than trying to time the markets in an attempt to be out while prices are falling and in when they are rising. The article notes that since 1945 there have been: (a) 59 periods of declines between 5% and 10%; (b) 20 periods of declines between 10% and 20%; and (c) 12 periods of declines of more than 20%. In all of these periods, there have been recoveries from the declines, in varying time frames dependent on the severity of the decline. The article observes that “the majority of market returns occur in a small minority of days and that the big return days tend to be unpredictable and hot on the heels of awful news. ” It also states that “buy and hold is a relative concept that needs a certain amount of flexibility to allow for liquidity, rebalancing and various life events such as retirement.”
At Park Piedmont Advisors, these are core components of our investing philosophy. And this is why we focus so much on appropriate asset allocations specific to each clients’ circumstances, which we then expect our clients to be able to maintain during periods of declining stock prices.