Where Do We Go From Here? Strategies for Moving Forward After a Market Correction

Strategies for Moving Forward After a Market CorrectionStart the celebration, the market correction of September/October 2014 is officially over. Or is it? Wouldn’t it be great if there were specific dates that could be identified as the beginning and end of downtrends in the stock market? Wouldn’t it REALLY be great if we had those dates before they happened?

While common sense says that an investor (unless you are a day trader) must apply a long term view, general behavior has the average investor connected to every short term up or down of any significance.

So let’s look at the recent short term numbers for this recent “correction.”

  • The S&P 500 Index peaked on September 18th at 2011.36 close. The bottom (as of 10/21/2014) for this period occurred on October 15, 2014 at 1862.49 close. This represents an emotionally challenging 148.87 point drop, peak to trough, or 7.4%.
  • The other measure worth watching is the VIX, or CBOE Volatility Index. The index represents the expected movement of the S&P 500 over the next 30 days. It tracks the swings in the market, is low when markets are good, and high when markets are dropping. As you might guess, the low point for the VIX was on September 18th at 12.03 and the high water mark was hit on October 15th at 25.22.
  • The close of the stock market on October 21, 2014 left the S&P 500 index at about 1941 and the VIX Index down to just over 16. The key to this statistic is that in just a few short days the market sentiment appears to have gone from talk of a possible 10% correction to “buying opportunities”.

To quote Warren Buffett, “try to be fearful when others are greedy and greedy only when others are fearful.”[1] The problem is that human emotion and “fear” keep people from investing when the markets are dropping, and “greed” can move people to keep investing when the markets are peaking. What emotions were you going through during this period?

Our firm spends many hours every week studying market trends, reading analysis from different investment managers, and working the analytics of different investment options, all toward the goal of building a balanced investment portfolio. The bottom line is not to forget about the bigger picture. As a long term investor, your two part goal should be to see your money grow, and to harness the awesome forces that money can generate.

 

Indices referenced are unmanaged and cannot be invested into directly. Past performance is no guarantee of future results. No strategy assures success or protects against loss.

Headline image by evoo73 Creative Commons.

[1] http://www.berkshirehathaway.com/letters/2004ltr.pdf

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