It seems lately that I am hearing more people ask, "The market is at an all-time high, should I sell? When is the correction coming?" I am curious as to why the question is being asked. Is it a matter of frame dependence? Is it human nature? Is it too much CNBC? I suppose it is only natural to question the sustainability of rising stock prices, given what the market has done in the last five years. The question now is: Historically, how has the market performed after a big gain? Below is a table that summarizes the performance of the S&P 500 Total Return Index since the beginning of 1970 through August 31, 2014. I looked at all of the five year annualized returns and analyzed the five year periods that immediately followed a five year annualized return of 20% or more.
The above results tell me that the returns of the market are, on average, lower after five year periods where the market has experienced a big gain. However, these returns are generally still positive. After the great performance that we have experienced over the past five years - the S&P 500 averaged more than 16% per year - it seems only reasonable that these above average returns will not continue indefinitely. Does this mean we should act in some fashion now to shelter gains and prepare for a downturn? Absolutely not. Remaining focused on your long-term objective(s) is the best strategy.
A correction is defined as a temporary 10% decline in the market. You have heard us say before, there is no way to consistently predict or time a market correction. As Bob always says, "Corrections always happen with unpredictable regularity." On average, market corrections occur about once a year. Truth be told, we have not seen a market correction since the decline that ended in 2011.
Looking at the bigger picture, I am positive about stocks in the US for a number of reasons.
When major market indices reach new heights, some investors may become understandably wary. The important thing is to remember your long-term objectives and not let your emotions control your investment decisions.
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