How Strategic, Long-Term Financial Plans Can Combat the February 2022 Market Correction

Authored By Andrew Thompson, CFP® | Managing Director, SC&H Financial Advisors, Inc.

Updated 2/24/2022 at 10:30AM

This blog was published before Russia’s attack on Ukraine early this morning. While the U.S. equity markets had already entered market correction territory, this global event has had a further adverse effect on the markets, and while these declines may continue in the near future, negative shifts in the market are inevitable. Eventually they will cease, we just don’t know when.

In the interim, the below sentiments still reflect our ultimate philosophy for successful long-term investors – stick to a goal-focused, long-term plan and try to avoid letting the rollercoaster of emotions that make us human affect our judgment.

The SC&H Financial Advisors Team is here to help should you have any questions or concerns about your current wealth management plan. Contact Us

As many of you may have seen, the U.S. equity market has recently entered what’s generally termed ‘correction territory.’ We know in this day and age it’s very challenging to tune out the noise of “this time is different,” as it relates to this latest market correction, but we’re here to remind you that you have a long-term, goal-focused plan, and that’s the best antidote to avoiding the rollercoaster of media attention.

What Is a Market Correction?

Correction territory means that the stock index falls more than 10% below its previously established record high close (in this case, early January 2022 was the high). This market activity is widely known as a correction because historically the drop often “corrects” itself and prices are restored to their longer-term trend. Market corrections are an inevitable part of investing. No financial advisor can pinpoint when a correction will start, end, or tell how drastic a drop prices will take until after it’s over. While we can’t predict when a market correction is coming or how long the correction will last, we know a correction is the rule, not the exception, occurring, on average, once per year.

Each time there is a market correction, there is attention and chatter that has the potential to fuel the belief that the latest market correction will be permanent.

The most important question our team of financial advisors asks themselves during these inevitable times is simple: Have we prepared our clients for the latest market correction? Our team’s confident and resounding answer is “Yes.”

Strategic Preparation for an Economic Downturn

One of the tenets of our investment philosophy is the understanding that we cannot predict the future. However, we can certainly prepare for its inherent uncertainty, as corrections are a common occurrence.

The average annual drawdown from a peak to a trough in the S&P 500 has for many decades been roughly 14.5%. The current decline may ultimately equal that average annual drawdown, although it could be more, or it could be less.

Regarding the current correction’s ultimate depth, we can make two important observations:

  1. Market corrections cannot be predicted.
  2. For long-term, goal-focused investors like us, it cannot matter.

When we began working together, we made a simple statement to you, and it bears repeating: if you’re to be a successful long-term investor and realize meaningful returns, you must be able to ride out a temporary dip in the market to emerge in a better spot on the other side of one. The average investor reacts too quickly to current events and over the last 20 years alone, their rate of return has been below inflation. But we stress to you, our client, to stay focused on your long-term, goal-focused plan.

Market Corrections Can Provide Beneficial Opportunities

For those of you still in the accumulation phase of your investing careers, we encourage you to view this market correction as a chance to be opportunistic, as the declines can enable you to accumulate shares at marked-down prices. The market’s ‘correction’ is the accumulator’s ‘sale.’

Similarly, for those drawing on investments in retirement, remember that we are holding cash reserves equal to no less than approximately two years of your living expenses, and oftentimes far more. With that being said, we’re not suggesting that we’re going to need to draw on those reserves, rather we’re inviting you to be comforted once again by the fact that we have them.

Lean on Your Long-Term Financial Plan and Dedicated Advisors

Your portfolio was and remains a servant of your financial plan, which in turn was derived from your most cherished financial goals. That progression again is:

You don’t see current events anywhere in that progression for a very good reason. In our experience, all successful long-term investors are continuously acting on a plan, whereas failed investors tend to continually react to current events, without heeding their overall strategy. We invite you to remain with us on the right side of that philosophy.

As always, please don’t hesitate to reach out to our team if you’d like to dive into this any further or talk more in-depth about your financial goals. We look forward to the conversation and appreciate your trust.


Sources:

Pg 16 of Guide to the Markets, J.P. Morgan, January 31, 2022

Pg 64 of Guide to the Markets, J.P. Morgan, January 31, 2022

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