My computer mouse pad says: "If you can't run with the Big Dogs, stay on the porch."
As goofy as it may sound, the "Big Dogs" of the investment world pray that the stock market crashes from time to time. Since "crash" is a little strong, the preferred euphemism for a minor downdraft is "correction."
Why is a correction a good thing? Because it lowers stock market values temporarily and offers opportunities to buy stocks and mutual fund shares at reduced values. When we take advantage of this opportunity, we are reducing the average cost of all the shares we happen to own. This is especially true if we have some shares that we bought on rising markets and at their recent peaks.
If you're a 401(k) investor, automatically depositing money every pay period, you are lucky because you don't have to think. It's dangerous when investors begin to think. We are sorely tempted to try to second guess what the market will do in the immediate future.
By comparison, staying the course and continuing to invest in stock mutual funds through those corrections will have been far more rewarding in the end.
If you're looking at your most recent retirement plan statement with some smug satisfaction, you might remind yourself about the fortitude required to continue buying during the dips. It may have been hard to appreciate during those dark days when you considered pulling the plug on your stocks, but you were buying low
and setting the stage for someday selling high. That day will come when you start nibbling away at your account to fund an eccentric personal retirement lifestyle.
So, looking forward to the next correction, when do we think it will happen? Pretty soon if history means anything.
A correction, by the way, is thought to be any decline of more than 5 percent. Since the S&P 500 has gained 23 percent in a nonstop march during the past four months, anyone could argue that a correction is now overdue.
Recent history includes the following corrections: June through July of 2009 saw a 7 percent drop lasting 29 days; a 5.6 percent drop in October of 2009 lasted 11 days; an 8.13 percent drop in January of 2010 lasted 21 days. The biggest was a 16 percent drop in July and August of 2010 lasting 70 days. On vacation at the time, I did my best to console readers with a column about the routine recurrence of the "summer doldrums."
The point of reviewing this history is to prepare us for the inevitable. Corrections of any magnitude are more anxiety-provoking for those who were traumatized by the plunge of 2008/2009. Corrections can be especially frightening for those who are just tiptoeing back after having left the market and retreated into cash.
Getting back in can be a challenge. The answer for many is to invest a regular amount periodically -- a technique called "dollar cost averaging." This approach will automatically capitalize on the "dips" we described above as they repeat themselves going forward. On the whole, the market over time can be counted on to rise in value.
We need to hold the thought that there have been very few rolling 10-year periods that have not seen increases in market values -- especially when we add in paid dividends that were reinvested.
Through the looking glass, we can see that biting the bullet through periods of corrections is what we get paid to do.
The invisible hand of economic forces would never reward us if we were taking no risk. The "risk premium" we get to enjoy as investors is the annual extra seven or more percentage points, on average, that stocks and stock mutual funds can be expected to earn -- per year -- over the risk-free rewards of money market funds or short term debt.
Play with the Big Dogs, or stay on the porch? We can ask ourselves, "What would Warren Buffett do?"