Think the stock market will go down? You’re right.
Much like a stopped clock is right two times a day, a prediction that the stock market will decline will also come to fruition at some point. The more difficult part of the equation is figuring out when exactly that will happen. Further, how far will the market go down and over what time frame? These, among many factors, make it almost impossible to accurately “time” the market with any kind of consistency. Even the most careful analysis of data yields inconsistent results over any reasonable period.
We have already been through quite a bit of volatility in the market this year, and many analysts expect more swings with a rise in interest rates all but assured. The recent history of the S&P 500 gives us a good example of what most analysts would consider normal market behavior. However, because essentially all stocks have gone up since about March of 2009, many of us have forgotten what it feels like for stocks to go down. Reminder: that can and will happen!
Through the end of last week (12/11/2015), the S&P 500 was -0.27% since the beginning of the year. However, one only needs to focus on last week alone to notice a significant drop of -3.74% (12/7 through 12/11). Despite last week’s decline, the cumulative return of the S&P 500 over the last three years is +50.12%. If you have been sitting on the sidelines in a bank CD or some other low interest vehicle “waiting for the right time,” that’s a lot of gain to miss.
I will finish with a small disclaimer that no investor is invested exactly like the S&P 500 index, and nor should they be. Diversification across many types of assets should help smooth out some of the volatility while providing appropriate levels of return over time.