The flip side is that as time passes, our memories color the past corrections with a brighter, lighter brush. This makes it important to revisit history and revisit your exit strategies well before the next correction.
Here are a few observations about market corrections in the past 12 years -
Observations
- The past 12 years have seen four corrections, reactions, pullbacks, or whatever you'd like to call them (2008, 2011, 2016 and 2018). As we all know, the most painful was 2008, so let's zero in on this correction.
- In 2008, Amazon pulled back 64%. This is the question you should ask yourself: if I owned it at $87, could I hold it through this 64% reaction all the way down to $34? Note: In 2008, it was $34.68. Today it’s at $1,773.94.
- The market indexes pulled back less than Amazon, Apple and the Consumer Discretionary Sector (XLY). The S&P 500 was down 56%, and VTI was down 57%. Note: Vanguard Total Market (VTI) has since risen from $27.05 to $159.64. That’s nearly +600% in under 11 years.
- Even five-star, gold-rated diversified mutual funds — such as Primecap (POAGX) pulled back 56%. On recovery, however, it’s up nearly 900% since the 2008 correction.
- Although five-star balanced funds which hold both stocks and bonds (such as PRWCX) are expected to be less volatile, they nevertheless lost 42% in the 2008 correction. Once again, the good news is that it’s up nearly 500% since that downdraft.
- Finally, it’s interesting that Healthcare funds (PRHSX and VGHAX) are up 900% and 550% respectively from the 2008 correction where they lost 38% and 37% respectively — much less than the market.
Conclusion
It is important to review all your positions and revisit the four corrections mentioned and shown in the chart below. Ask yourself what percentage pullback you could tolerate for each and every type of equity you own. A correction is inevitable. Are you emotionally prepared for it? Panic is not a profitable investment methodology.