A stock market correction is an inevitability. In recent history, we saw two 10% corrections in 2018, a 13% correction in 2016, a 12.4% correction in 2015, a 20% correction in 2011, a 16% correction in 2010, and a -57% correction in 2009.
Then of course, we saw the fastest correction in history, a 32% correction in just one month in March 2020. At least I wrote about investing in the bottom then.
Whenever there is a stock market correction after long periods of stable growth, it always feels bad. Although it’s never fun to lose money, it’s good to face the situation head on and focus on the positives and what we can learn.
With valuations so high in the S&P 500 today, expect another stock market correction in the near future. Margin debt is way up, which makes me worried.
Silver Linings Of A Stock Market Correction
1) A catalyst to finally learn about risk management. If you’ve only been investing since 2009, the path towards building stock market wealth has been relatively straightforward. I argue its been too easy for the 35 and under generation to build wealth, thereby creating a false sense of security. Being overconfident in your investing abilities can be devastating once you’ve accumulated a large nest egg.
See: Recommended Net Worth Allocation By Age
2) The ability to accumulate stocks at lower valuations. The keyword is “valuation,” and not price. If the price is lower by 10%, but earnings are cut by 10%, then you’re paying the same valuation for a stock. But if prices move 10% lower and earnings come out the same, then you’re getting yourself a deal.
The consensus 2018 S&P 500 earnings estimate is ~$155 (+17.8% from 2017). Therefore, at 2,500 on the S&P 500, the market is trading at a reasonable 16.1X forward earnings vs. long term average of ~15X. The consensus earnings expectation for 2019 is for earnings to grow by another 10% to $171, or 14.7X 2019 earnings.
The trillion dollar question is whether earnings will grow as expected, fall short, or exceed expectations. Valuations are generally considered “reasonable” if the P/E to Growth ratio is around 1X e.g. 15X P/E and 15% earnings growth.
Except for the rise in the 10-year bond yield to 2.85%, there was no other fundamental news that wasn’t already out there that could drastically affect earnings. Therefore, at the moment, it looks like investors are getting a valuation discount. And from a bond investor perspective, you’re receiving higher yields.
3) It takes time for corrections to play out. According to analysis by Goldman Sachs, since WWII the average correction is -13% over a course of four months. It then takes an average of four more months before the S&P 500 recovers all its losses. In other words, don’t use all your dry powder all at once if the stock market is down 10%+ in just a couple weeks. Rather, leg in through multiple tranches because timing the market is too difficult.
If you have a long-term mentality, you’ll be able to better contain your rush to sell and rush to buy.
4) A return to humility. Every time I write an article about investing, without exception, there will inevitably be someone who comments or e-mails saying how much money they’ve made in the stock market or how they timed a trade perfectly. Over social media, we witnessed a phenomenon of older folks bragging about their $1,000,000+ 401(k) balances. And younger folks love to shout from the top of their lungs how much they make every month online. After a while, this starts to get old.
Financial writers, like yours truly, will also begin to write with more humility. A downturn helps remind me that the focus of Financial Samurai is on learning so we can become better investors, better partners, better citizens, and ultimately happier thanks to the freedom money buys. My finances are used for illustrative purposes only because nobody should give a damn about my wealth except for my family.
As investors, it’s important to constantly remind ourselves that over the long run we are not smarter than the market. We must not confuse brains with a bull market, nor should we confuse stupidity with a bear market.
5) You don’t feel as bad selling risk assets too soon. One of the most difficult things I had to overcome when selling my SF rental house was accepting that I was probably selling too soon. In my mind, owning San Francisco real estate is a multi-decade no brainer. But I couldn’t take being a landlord anymore, especially after rents fell 10%+.
After I sold in mid-2017, the stock market continued to go up. To not be left behind, I re-invested my house sale proceeds into stocks, index funds, muni bonds. and real estate crowdfunding. But I took $815,000 in exposure off the table by wiping out a mortgage.
Now that the stock market is going through turbulent times, I feel great having sold. I’d be more stressed out today if I held, knowing that I passed on a great offer worth 30X annual gross rent, received less rent, and had to deal with maintenance issues and problem tenants.
Related: Investment Ideas For Reinvesting The Proceeds Of Your House Sale
6) You feel great holding cash. Despite reinvesting my house sale proceeds, I still was left with about $300,000 of cash (out of $1.8M) plus a 3% yielding CD worth about $184,000. When the markets are going up, you feel bad that your cash is earning you practically nothing. But now that the stock market is going down, having lots of cash feels like the best thing ever! It feels amazing to have an asset that doesn’t lose money.
After the S&P 500 corrected by 10%, I deployed half my liquid cash stash. I plan to deploy the other half if the market corrects by another 10%. With interest rates up, I can easily find a new risk-free home for my CD proceeds with the same rate. Cash management is all about stress management!
See: In Times Of Uncertainty, Take Stock Of All Your Cash
7) A chance to finally build your long shot. If it wasn’t for the 2008-2009 financial crisis, Financial Samurai would never have been born. Without Financial Samurai, I wouldn’t have been able to have as much carefree freedom as I have today.
The downturn made me fear for my job and my wealth so badly that I finally decided to do something about my fear. We’re nowhere near financial crisis-level panic today, but the correction that began in February 2018 reminded me of the stress I felt 10 years ago.
If you depend on only your job and your investments to keep you financially secure, a violent correction is the perfect time to start brainstorming new ways to make money.
Yes, it helps to whip your spouse into working harder and longer so you can just relax. However, spouses sometimes also could lose their jobs and investments.
For most people, investments should be considered a tailwind for financial growth. Building a business where you own most of the equity is how you can build next level wealth. It’s harder to get rich working for someone else.
But if you don’t want to venture into entrepreneurship, do well at your job. Get regular raises and promotions and aggressively save and invest for the long term.
A Refocus On What Matters Most
If you are not careful, a stock market correction can suck up all your time. It can make you a little crazy. During one of the -4% days I realized I was already on my computer for 2.5 hours straight watching the markets burn. I was reading everything I could about the why, the what next, and what to do. Don’t let a stock market correction take over your life!
Once I realized my glued obsession, I shut my laptop. Then I went downstairs to see my wife and son, gave them both big hugs and kisses and started to play. After all, the point of financial freedom is to not worry about money.
In 20 years, this correction won’t make a lick of difference. Don’t forget to enjoy your life during the process. If you need me, I’ll be finishing up my underground bunker just in case the world comes to an end.
Recommendation To Build Wealth
A stock market correction is an inevitability. To keep your head on straight during the next stock market correction, sign up for Personal Capital. It is the web’s #1 free wealth management tool.
In addition to better money oversight, run your investments through their award-winning Investment Checkup tool. It will show you exactly how much you are paying in fees. I was paying $1,700 a year in fees I had no idea I was paying.
After you link all your accounts, use their Retirement Planning calculator. It pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms. Definitely run your numbers to see how you’re doing.
I’ve been using Personal Capital since 2012. As a result, I have seen my net worth skyrocket during this time thanks to better money management.
My silver lining is remembering that I’m not too late to the market. I just gotta get in and stay in and things will change.
With all that free money out there, I believe that corrections will have a very short-term recovery.
Of course, all bets are off if inflation (therefore rates) increases.
I’ve written about this in my 2018 Investment Outlook. Only:
– Inflation or;
– Major world-wide event.
Can cause a bear market.
Now is a great time to invest in things that bring immediate and short term returns, like paying off debt! As we await the likely market correction, paying off debt now will free up future cash for when stocks are at a more attractive price. Not only does this eliminate your debt quicker now, but you’re be poised to jump on the great opportunities available in a down market!
I agree with all of this! I’m definitely going to hold on to cold hard cash a little more tightly this time. It will be nice that at least with that I’m not losing money even though there’s a stock market correction going on. But it may also be a great time to buy but gotta spend hours of research to find great picks. I totally understand how you can get so obsessed with the market. When I started investing, I used to freak out over the smallest dips and even now I find myself researching for hours on some of my investments. Thank you for this post and for a reminder that there are more important things in life than money, it was a great read!
Mrs. Groovy and I went into 2017 with an asset allocation of 35% equities and 65% bonds/cash. With that allocation, our returns were obviously below the S&P 500. But because of our one individual stock, a lithium mining concern, our returns weren’t horribly below the S&P 500 (16.9% vs. 22%). Anyway, we went with such a conservative allocation because last year was the first full year of our retirement, and we don’t want a 2008-like crash in the first few years of retirement to destroy our retirement plans. So we’re itching for the next bear market. I know that sounds sick, but we have a lot of dry powder to take advantage of such a calamity. Great post as always, Sam. Cheers.
Sam, what did you invest your first tranche in, S&P Index?
At about 750 in 1997.
Just in case any of you younger folks read Sam’s initial entry point into the S&P 20+ years ago and think you’ve missed the boat, just a reminder that historical returns of the S&P for the last 100 years WITH dividend reinvestment (very important for compounding returns!) is 10.4% (feel free to check for yourself at https://dqydj.com/sp-500-return-calculator/). Using the rule of 72 (if you don’t know it you MUST Google it!!), the S&P would double roughly every 10 years, equating Sam’s entry point to an S&P of 3,000 today. Just to be clear, that doesn’t necessarily mean that the S&P is currently undervalued (although in a lengthy comment I provided earlier, I think valuations are very reasonable right now for LONG TERM investors (10+ year time horizon); just wanted to share my opinion for you younger investors that you haven’t missed the boat by any means – your biggest asset is what so many of us wish we had more of…TIME…use it to your advantage!!
I plan to buy in dips. I’m grateful for the correction being a long-term investor, lol.
On another note, I came across an interesting post on Rockstar Finance where a writer dove into how investing a lump sum is more favorable than DCA – and that’s making me reevaluate when I should strike.
The silver lining is that I can watch and l̶a̶u̶g̶h̶ learn from them who don’t know what they’re doing. How else are you supposed to learn from those who don’t know what they’re doing?
I don’t see a “cloud,” so I don’t see the need to find a silver lining. This is just normal stock market movement.
Great post, I like the tone it is written in. Yes being FI should take these worries away and allow you to enjoy more important things in life. For me this was a bit of a wake up call, but I believe in 10 years from now this will only be a blip on the radar. If you take an S&P 500 graph and filter for the maximum period you can not even see the corrections of 30 years ago
The way I look at this market is I think the market is re-balancing the same way you re-balance a portfolio from 70/30 to 60/40. I think we narrowly missed deflation through Fed manipulation and the 9 year bull was simply movement into more risky assets, not truly a bull. As bonds rates and interest accounts rise pressure will come off on stocks and growth in equities will be lower as money moves to safety. That’s not a bear market, it’s a return to normal allocation across asset classes. Re-balancing reduces risk and improves diversity, both very desirable. The way you make money is to reduce risk and diversify so your portfolio behaves like the market.
Here is a silver lining: Re-allocation is a great time to tax loss harvest if you have money in post tax accounts!
The biggest silver lining for me by far is the rise in rates. I’ve been dreaming about 5% treasuries for years. My stock market money is for the last 20 years of my life, a 5% guaranteed rate of return would take care of me for the next 20.
Please, please bring on inflation!
P.S In dollar terms I have lost a boat load of money in the last couple weeks and it is unpleasant. However, I welcome anything that will get rates back to a more normal level.
Thanks, Bill
Long time follower of your blog and thanks for this post. I’m curious what your thoughts are regarding USD valuation against major European currencies. My thinking is a hat good is a 15%business tax cut is the USD is worth 15% less compared to GBP/Euro and other major currencies? Combine that with rising bond yields, I feel like people are losing confidence in the US and we’ve got some potentially strong indicators of a bear(ish) market. I’m conflicted in my strategy since earnings and jobs report continue to perform so well
I’m not one to try to time the market, so if I’m going to invest, I just do it – which means dollar cost averaging and not having a huge cash surplus most of the time.
I’m wondering if these corrections and such would be good times to leverage an ‘opportunity fund’. Normally that’s for seeding a future business idea, maybe even taking a random vacation…it’s cash we’ve got that has no designated purpose and isn’t earmarked for an emergency fund.
Would you think that strategy would be a good use of that money? I don’t know…
Point 3 has been a good lesson for me in the past. I used to get very excited at the hint of a decline and jump straight in – these days I try to be much more patient and take my time topping up with new investments.
Its funny that no matter how much you remind yourself that no-one has a clue what will happen next, you can’t help but read all those headlines that are plastered around the media speculating about it. Glad it only took you 2.5 hours to remember and get back to what matters!
One comment I haven’t seen yet here is that yields rise in a bear market.
When compounding an investment, say in an index fund, is taken into consideration, the compounding happens faster.
Dollar cost averaging is now working better than it was prior to the correction. The market is more attractive (and may get yet more attractive still)
The market went down and I lost thousands. I looked at my account, laughed and bought more. I love the volatility. It can drop 90% more and I’ll laugh and buy all the way down.
The bear is where you make the money! Let it come! Realistically, I don’t see a major bear coming this week though. Bummer! The market slows down over time so an overnight shock event strikes me as low probability when we are just starting to see slowdown in the coastal cities. Rising interest rates won’t affect the market overnight but as it rises it’ll slow the market and the real fun will begin (to have a healthy economy).
I did my regular Jan 1 contribution in my tax free account. Going to wait and see if there’s more discount before deploying more capital. Hope you’re ok I included you in my blogroll here. Your blog educated not just me but multi-generations of people. Millennials would account for a large chunk IMO
Humility is nice!
Seems like everyone who bought anything has been reporting how they have been crushing it. In my opinion I think it is awesome. If everyone is prosperous then no one will go hungry.
In reality though it is a small subset of the population that is really feeling the market moves. I feel grateful to even be feeling this correction. Most of the people I know don’t really think more then a couple minutes about what the market is doing.
We should all actually try to care less and keep a long term view. Folks like us though are just intrigued by what is happening. Finances are a hobby for some (nerds like myself included).
Blogging to me is still a lot of fun and I like tuning in to get opinions like yours and others. What other world could we communicate in if not for blogging? I am in Denver and you are in San Fran. I get your perspective of what is happening there through your writing so amazing.
I am in the group that has been experiencing this bull and is young (27). Overall though I have not gotten carried away. I aggressively invest but I keep realistic expectations.
The market going down just gets me pumped to allocate more and work harder. Coming from a normal background makes you appreciate every dollar more you grow in life.
Without gratitude no one can fully enjoy the life they have.
Happy buying in 2018.
The recent drop in the markets has been the first that I’ve gotten to experience. I began investing in the summer of 2016 and have invested pretty regularly since. Losing my first $1,000 in a day last week has been an important milestone in testing my willpower to stick with the long-term strategy.
It’s always a bit nerve wracking when corrections happen and the possibility of a recession creeps up again. I try to remind myself of the last big downturn and remember how much it increased my beliefs in the importance of financial independence, aggressively saving while my income was at is peak, being mindful about spending and also keeping my investment focus on the long run and trying not to be afraid to leg in when prices are down. It’s easier said than done to use corrections as opportunities to buy when everyone is panicking and running for the hills, so it helps to breathe, get a calm head and take a few steps back to view the big picture. Thanks for highlighting the positives!! And love that image of you suddenly realizing you’d been watching the markets so intensely for 2+ hours straight and then putting it aside to go spend time with your family. We gotta treasure each day and make the most of everything!
I agree with a comment above. This is nothing. 10% is easy to stomach. Let’s see how next week plays out. I was preoccupied with my rental so I didn’t pay attention to the market that much last week. I finally found a good renter and signed a lease. Woohoo! That condo should be good for another year. Once the next door building is finished our property price should increase.
I contributed $2,000 to my i401k last week. That was about it. If the market drops 15%, then I might invest a bit more. I’m not going to get excited until we see a bear.
I really loved reading this article and the ending part was just refreshing.
I think the message of being humble should be pushed harder to the media, even a lot of my friends confuse brains for a bear market and that really scares me.
I’ve been reallocating for the long-term recently from super-low, but safe returns. However, if I’m going to be comfortable with early retirement then I need to be learn how to do nothing during a bear market/correction.
Sam, another good post, good analysis, and good recommendations. Just to add a few other thoughts in support – the historical average P/E of 15.5-16 also had a historical average 10-year treasury of about 5%. Given that we’re now down to a 17 P/E with 2.85% treasuries, things look more than reasonable to me, especially when you consider we have a very pro-business/pro-stock market administration and Fed, low unemployment with growing wages (lots of people to buy things), and continued historically low inflation (yes, I get that low unemployment and growing wages can drive inflation, but we are a long way from inflation being a problem). Of course, anything can happen, earnings can tank etc etc, but if you’ve been waiting to deploy cash, now is the time (in stages as Sam suggests). And is you’re a millennial, get off Instagram and get on to your discount brokerage app and start buying SPY or a comparable low cost mutual fund. Even if the market drops another 40%, those with a 10 year+ time horizon will look back at these times on a long term chart and they will look like a pimple as Uncle Sam suggests in this post. Be long and prosper friends!!
Just standing at the bus stop yesterday and wishing we hadn’t front loaded our 401k for the year at the peak of the market 2 weeks before but man if that’s not small marbles, I don’t know what is. Hey, we have one 401k loaded to go!
A correction is healthy. A crash would be better in the long run if you stand ready for it. Be happy and enjoy life! Don’t always be greedy, cover your behind and yes hug your wife and kids!!!!
Your point about having dry powder ready to deploy is very important in order to get high quality stocks at lower prices. The difficult part is not wasting all of your capital all at once and to keep buying lower into stages.
In 2008/2009 I remember buying some stocks from historically great companies that were down 50%. I thought that there was no way they could go much lower so I ended up burning through most of my dry powder. Well, I found out that stocks can indeed continue to lose value and some of these stocks proceeded to go down 70-80% from their highs. In theory it sounds easy to keep buying lower, but when GE gets down to around $7 a share for example it is very difficult.
My advice to most people is to spread out how often you buy stocks that are going lower in a correction or bear market to monthly or every few months instead of every time you see the market flashing negative values.
Great perspective. A lot of FI folks are experiencing for the first time what it feels like to ‘lose’ a huge chunk of change in the market in a very short time period. Not easy to see a years worth of living expenses disappear so quickly – but like you said, in 20 years we won’t remember or care about last week. Good call on turning off the computer and getting same family time!
Thanks for the perspectives. It is pretty amazing that we’ve been in a bull market since 2009. Hopefully those who have only experienced this market are not rushing towards the exits right now.
I remember the stock market back in 2008/2009 when Bear Stearns and Lehman were folding. I was going through the analyst program and did not fully appreciate what was going on. However, those trading days were a lot rockier than the ones we’ve seen this week, and they mentally prepared me to view these corrections as buying opportunities.
A few simple strategies to deal with market corrections are:
1. Consistently buy into the market, such as with your 401k, and try to ignore index levels
2. Reserve a pool of cash to invest in your top picks when a correction passes through a threshold (5%, 10%, etc.)
3. Re-balance your portfolio semi-annually, or annually; for example if you have a 70/30 stock/bond mix, sell and buy accordingly to go back to your 70/30 mix. This way, you are selling high and buying low without thinking too much about it
Personally, we do 1 and 2. We don’t stress too much about the retirement funds and we are opportunistic buyers.
Good stuff. Especially re-learning risk management after over a year with no 3% corrections and the lowest realized volatility on record.
I’m still worried about a rise in rates continuing. The inflation data over the next year is important. The Dollar falling while rates rise tells me its probably starting to be priced in. If inflation finally arrives then it’s going to force The Fed’s hand and the pretty calm rate rise so far could become disorderly.
So far this year your long end bonds are -7% and S&P -2%. The drop in bond prices is great if you’re sitting on cash to deploy, but doesn’t help if you’re already in. If fixed income is ending its 35 year bull market and we are reflating then the stocks/bonds risk parity model is going to get flipped on its head. I think this 5 weeks is just a taste of what could come.
I know this goes against plenty of investment advice, but I think you need a 3rd leg on the risk parity model of cash/gold going forward. Cash loses inflation and gold has storage. In a reflating environment gold should at least keep up with inflation though and your cash will keep you out of equity and bond re-pricing to deploy at better levels. Build that cash/gold position for now and once the attempts at quantitative tightening have played out you will have dry powder and avoided some of the risk parity bubble pop.
Larry – I have been using cash as a substitute for bonds for several years now. Until the last few weeks, I would have been better in bonds but I just didn’t think the risk was worth the potential small return at those interest rate levels. I guess there is a case for gold but I just have a hard time buying it. A month ago, I did invest a small % in TIPS as an insurance policy against inflation. Waiting for the 10 year to hit 3.7 to 4%. A word of caution. I am seeing headlines that are screaming “high yield bonds have worst week in 2 years”. Again, the financial press has no idea of the damage they do. High yield bonds simply tracked what other bonds were doing. They are still amazingly risky. The day of reckoning is going to be awful for that asset class but I suspect that is a story for a year or so from now.
Agreed on the dramatization of the move in rates thus far. The last month has actually been extremely orderly, even in high yield. Also agree that the reckoning there is in the future, whether a few months or a couple of years. This was probably just a warning shot. I think the risk/reward is still skewed against investing there until the global quantitative tightening policy path is discontinued.
Your point about the cash lagging the bonds for several years now until the last few weeks is important. The bonds outperformed, until they didn’t. All you can do is weigh the probabilities and prepare for the future.
I was with you for a long time in fearing gold, especially with the bubble action in ’11. Even if all the monetary and fiscal stimulus does not create inflation though can you still feel confident holding most of your currency risk in dollars with the deficit expansion? The “fiscally conservative” party just released a 10 year budget plan that at its most optimistic can’t even pretend to balance the budget anymore. Gold gives you inflation protection as well as currency protection that cash cannot.
I would still only advocate max 10-20% in gold, but I think it provides a better diversification over the next few years to decades. I also believe that it has a pretty low floor from here, barring a massive deflationary move. A stock/bond/cash diversification covers you in most situations, but not in an inflation spike or weakening dollar. I think both of those have higher probabilities going forward than are being priced into the markets.
Plus, look at the over 4.5 years of coiling action on the gold monthly chart. Above $1400 and it’s a thing of beauty
I fall squarely into that under 35 group and investing/wealth building has admittedly been very easy especially over the last 15 months or so. Now that the markets have turned, maybe a little maybe a lot, will be the real test. Our assets are very heavily weighted towards the stock markets, but I do have to say that I’m pretty happy with my reaction during the chaos this past week. Despite seeing the markets down more every time the quotes updated, I didn’t panic at all. Well, actually I did kind of panic, but that was only because I have pretty much no cash on the sidelines right now so I can’t at least tip toe into this correction.
Thanks Sam. I like your perspective. I was told by a mentor early on in my career in financial services (was the mid 90’s), that the real money was made in bear markets, not bull markets. Having lived through 2 truly roaring bears, I can say without a doubt that is true.
This correction is nothing, so far. I would have bought in a little bit on Thursday had I not been otherwise occupied but my real stack of cash is waiting for maximum pessimism. That is at least a 25 to 30% bear. NOT predicting that. I have no way of knowing what will happen for certain. The standard PE TTM and Shiller are way overvalued (still) and we were all told that as long as interest rates stay low, these valuations will be OK.
Well, rates are going up so we have to reset what valuation level is considered to be OK. I highly doubt that 24 on the standard PE and 31 on Shiller. Chances are we will see more downside. I don’t know that for sure but the numbers indicate it is likely. Here is how I learned to handle a bear market over the decades:
1. Hopefully you were selling a bit into strength and have built up a reserve.
2. If not, don’t panic if you have a long time frame and are already allocated between various asset classes.
3. If you are all in on the stock market and have little cash or room for error, now may be the time to consider put options as insurance. Either that or sell if you think the market will go down much further. That should be your last option. The puts are insurance that are not that costly. Caution – there is a good chance your insurance will expire worthless which means you will lose the money you invested.
4. If the market goes down 20% or more, start to really invest in equities if the PE’s contract. If it is a recession you cannot go by PE since earnings will fall and PE’s will skyrocket. Then it is more about feel.
5. You don’t have to invest all you cash you obtained from selling into strength right away. Perhaps 30 to 50%. It can be a combination of low cost index funds and high quality companies that are clearly undervalued.
6. Be patient. The market could keep going down. My own rule is that I go to 5% above my ideal allocation if the market goes down 35%. I was 10% under my ideal allocation for years, and, recently was 15%. I got lucky (that is all it was) and sold some 2 weeks ago.
7. Understand that bear markets are ultimately a positive and that the markets do go up over time. Also, realize that any $ you might need within 5-7 years should not be in the stock market. I started to say that about the bond market several years ago as well and I still think there is more pain to come there. The stock market moves up 63% of the time and the random walk does apply – long term.
8. Don’t panic unless you have no spending and sunk everything into the market and had a margin account. Then, accept this as a lesson and reallocate properly with at least 6 months in cash.
Why is 16x reasonable
Historical S&P 500 P/E multiple is around 15X and earnings are expected to grow by ~17% this year. What do you think is reasonable?
During a correction everyone gets corrected. A good gage though is to see if one can still outperform the S&P during that correction. For now, I’m holding up pretty well. Still green for year. Things can change very quickly though.
Agree AAB. I check that every week. All the way through January and February to date my gains were 5% greater than the TSX and DJIA average. I am still in the green YTD too. I don’t like watching the portfolio decline but I keep reminding myself that I can survive and recover from a major 2008/9 correction probably without even cutting back on spending on luxuries.
Yes, it’s a good measure for long term aggressive investors who manage their own stocks. When the market is up try to be up more than the S&P. When the market is down try to still be up more than S&P.
AAB, yes, that is what I do too. I am not sure I am long term or aggressive, but for lack of a better benchmark, I use the stock market. Partly because of the standard advice to buy ETFs that track/index the stock market — to see if I can do better over the long term and so far it is easy to do better.
When zooming out, this correction really isn’t a big deal at all. For the short term, it might look a little scary for some, but like you mentioned it’s actually a great opportunity.
I took advantage of the cheaper prices and pushed some money in on a couple days of the down days. I’m hoping to push some more in if the rockiness continues over the next few weeks.
Now we just need the real estate market to cool off a little as well so we can find some more deals out there! ;-)
— Jim
Great article. I hope the rise in interest rates bring some sense back into the real estate market, specifically DFW.
LOL, we got tired of house hunting for years in Denver’s out of control market to DFW which is also now out of control. We wanted N. Dallas but ended up in far west fort Worth. We’re moving overseas in around a year though.
Hi Sam,
Been a reader of yours for a few years now. You’ve inspired me, and I really respect what you continue to do here.
Thanks for the nice dose of perspective. I started investing in 2014 and definitely fall into the “35 and under generation” you write about. It’s been spectacular to watch my Vanguard accounts grow quite nicely over the last few years. I can’t say the correction came as a complete surprise, but you never know how something feels until you experience it for yourself. Last week was certainly an eye-opening experience.
Whatever direction the market takes at this point, sending my best to you, yours, and all the readers on here. I know I’ll be looking here and elsewhere for guidance in the coming weeks and months.
Thanks again for all you do.
Great essay. I too was obsessed with the market the first day of the drop. But the next day I participated in a day of volunteering for an organization that helps the truly needy and vulnerable. I realized that at the end of the day none of the volunteers mentioned the gyrations of the market or the market at all. It just is irrelevant for most people. Their attention was focused on what mattered.
I have more than enough cash flow to weather even a long term bear market so I’ve decided to not give the ebbs and flow of the market my attention. There are more important things to do with my time. Thanks for the reminder and the reinforcement.
Silver lining indeed and thanks for putting things in perspective I took my timeastnniggtnfor some reallocation of my assets and to transfer some cash into my Vanguard account in preparation to buy over the next few weeks. Figure if I was going to invest, then I might as well keep investing.
I have some dry powder saved up for situations like this. I bought on the 10% dip as well as plan to buy in 2.5% tranches going down as well until I run out of money. These are situations that I’m glad I set aside a little bit of cash :)
You can run out of money much quicker than you realize. Was your plan to increase the amount of money you are allocating to stocks every step down? This really helps to lower your cost basis and pick up plenty of shares for each stock.
Yep, I was planning on increasing the amount each 2.5% down.
So, you have an underground bunker too, huh…
So why’s it called a correction and not a deflection or a slump?