How to Ride out a Correction Like a 'Market Stoic'
Socrates spent decades as a teacher – or, as he liked to describe himself, a "midwife to the soul."
 
But then, an Athenian jury sentenced him to death for his ideas. When his friends and followers in attendance began weeping, Socrates spoke...
 
"What is this strange outcry? ... I have been told that a man should die in peace. Be quiet, then, and have patience."
 
Partly inspired by the story of Socrates' death, Zeno of Citium created the philosophy of Stoicism as a way of life. Its core principle: to find happiness, you must accept the present moment and the uncontrollable forces of nature... focus your efforts on things you can control... and not be consumed by desires.
 
In other words, you can't get through life without accepting the things you can't change during hard times.
 
Today, you need to be a "Market Stoic"...
 
With the market hitting new highs and valuations getting stretched, everyone wants to know how to dodge the big, looming crash. "When will it hit?" "How will I know when to get out?"
 
Unfortunately, no magic indicator can predict a crash. But don't worry. Even if the market corrects, we're likely not going to see a massive 40% fall – for one reason.
 
Let me explain...
 
You can't build your wealth in the market without accepting some volatility.
 
The market drops by 10% – the generally accepted measure of a "correction" – with surprising frequency. Even drops of 20% – "bear markets" – are common. It's going to happen.
 
Clearly, you want to avoid drops akin to the Great Depression, when the market collapsed 80% from its high and didn't reach a new one for almost 30 years... or the 2008-2009 financial crisis, when the market plummeted more than 50%.
 
But the 10% and 20% drops... they're just part of the game.
 
And believe me, if you've got, say, $500,000 in the market, watching $100,000 of your wealth evaporate feels devastating.
 
But it's not...
 
Most corrections are insignificant. If you set aside the major crises of the dot-com bust and the 2008-2009 financial crisis... over the last 12 corrections of 10% or greater, it has typically taken about five months to earn back losses. And sometimes the markets bounced back in as little as 32 days, like they did in 1997 or 1999.
 
But what about the true bear markets? Those big declines coincided with economic recessions.
 
Here's our tally of the past recessions along with the market pullbacks from peak to trough...
 

Recession Start
Recession End
Market Downturn
August 1929
March 1933
-86.0%
May 1937
June 1938
-54.0%
February 1945
October 1945
-29.6%
November 1948
October 1949
-20.6%
July 1953
May 1954
-14.8%
August 1957
April 1958
-20.7%
April 1960
February 1961
-13.9%
December 1969
November 1970
-36.1%
November 1973
March 1975
-48.2%
January 1980
November 1982
-27.1%*
July 1990
March 1991
-19.9%
March 2001
November 2001
-48.9%
December 2007
June 2009
-56.3%
Average
 
-36.6%
* Measures a single downturn from two twin recessions.

This picture looks grim. But it turns out, corrections just aren't as bad when they don't have a recession attached to them...
 
According to numbers compiled by Ben Carlson of Ritholtz Wealth Management, when the market drops without a recession, the average decline is only about 19.4%. And if you limit that to the modern era – 1970 onward – the average drops to 17.5%.
 
Just take a look at our tally of double-digit losses in the S&P 500 Index when we weren't in recession...
 

Time Frame
Market Downturn
1939-40
-31.9%
1941
-34.5%
1943
-13.1%
1947
-14.7%
1961-62
-26.4%
1966
-22.2%
1967-68
-10.1%
1971
-13.9%
1978
-13.6%
1983-84
-14.4%
1987
-33.5%
1998
-19.3%
2002
-14.7%
2010
-16.0%
2011
-19.4%
2015
-12.4%

The lesson here is simple... Ride out the recession-free declines in the markets like the bumps in the road that they are.
 
On that front, we need to check in on the economy... It's strong.
 
The latest quarter's real gross domestic product (GDP) growth checked in at 3.2%. Unemployment is low, only 4.1% last month. Job creation is strong... And industrial production is growing.
 
You can't, won't, and shouldn't try to time a 20% correction in the market with your retirement portfolio. It's going to happen. It's the price of playing the game.
 
And given the state of the economy, there's little reason to suspect a decline worse than that.
 
Eventually, whether it's in the next month or year or two, the market will turn on all of us. And we'll need to sit back and take it... with calmness.
 
That's not to say we do nothing. Like the Stoics, we're going to focus on the things we can change.
 
Follow a thoughtful asset-allocation plan... set reasonable goals... and limit your investing to quality businesses that compound capital over time.
 
Here's to our health, wealth, and a great retirement,
 
Dr. David Eifrig
 
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