- There WILL be a stock market correction at some point in the future.
- The right portfolio design will help prevent you from being too aggressive (or too cautious) in all market environments.
- The evidence is clear that corrections cannot be reliably predicted.
- The market constantly schemes to convince investors to change their portfolio structures at just the wrong moment—and the market’s always looking for new victims.
With the stock market reaching new highs (again), this may seem like a strange time to talk about market corrections. However, we can think of no better time to remind investors about the importance of having realistic expectations in both good and bad markets.
All forms of investing require taking risk in one form or another. But sometimes, it seems as though there is plenty of reward for investors without commensurate risk. Other times it seems investors are taking on plenty of risk without receiving much reward. These periods can cause investors to have unrealistic expectations about their money and can be very dangerous for investors. That’s because the stock market constantly schemes to convince investors to change their portfolio structures by becoming either too aggressive or too conservative at just the wrong moment.
I have advised clients through 33 years of market ebbs and flows. One lesson I’ve learned over the years is that the market’s scheming never ends and it is always in search of new victims. An advisor’s job is to protect clients from that scheme by creating a portfolio plan that acknowledges that both good and bad periods occur. A good advisor uses evidence from peer-reviewed academic research to build a portfolio that can withstand the test of time.
Yes, there WILL be a correction at some point in the future. When? I really don’t know. In the meantime, investors should resist the temptation to take on more risk and should instead focus on maintaining the structure of the portfolio that made sense for them in the first place.
For more about portfolio design and the smart use of peer-reviewed academic research, you may find this video series about Evidence Based Investing helpful.