Over the past three months, it certainly hasn’t been relaxing to look directly at the ratings of the major stock market indices. Because it is red that, most of the time, characterizes the daily behavior of the indices and the movement seems only to be accelerating, as shown by that of the S&P 500 index, which entered correction mode by accumulating a devaluation of more than 20% since the beginning. of year.
Posted at 6:30 am
Monday was once again very lively in all the stock markets on the planet and, above all, strongly tinged with red, a hemorrhagic red, as if the latest inflation statistics in the United States had given the alert and provoked universal awareness that the situation it is still far from being under control and is even at risk of getting worse.
Small consolation, despite the sharp 2.6% drop in the S&P/TSX on Monday, the Canadian stock market has yet to suffer a devaluation of the magnitude seen in the American or European stock markets since the beginning of the year.
We may not have entered a bear market, but the Canadian market has now officially entered a correction, having lost over 10% of its value since peaking earlier in the year, which is not a very festive mode either. . It also smells a bit depressed at home.
In such circumstances, it is important to remember that market corrections, regardless of their severity and duration, are part of the life cycle of stock investing. When the markets begin to retreat and show no signs of wanting to change course soon, we spontaneously have the reflex of wanting to get out of this infernal and distressing spiral at all costs.
History teaches us, however, that a wait-and-see attitude is always more profitable in the medium and long term, as the numerous episodes of stock market corrections that have occurred over the last 75 years have shown us.
On Monday, the Reuters financial agency recalled that from 1946 to today, the S&P 500 index has gone through 13 bear markets and recorded average losses of 32.7%, which includes the brutal fall of 57% during the financial crisis of 2007-2009.
On average, the index reaches its lowest level one year after officially declaring itself in bear mode (after accumulating a 20% loss). Historically, it takes two years for the index to recover to the peak from which it started.
The last bear market in the S&P 500 lasted just one month between February and March 2020 when the pandemic hit, while the longest bear market will have lasted 69 months from when it bottomed to when it came back to the top, when the market was bearish. from 2000 to 2003.
The dangers of synchronicity
Many investors still have the reflex of wanting to sell their holdings or even their equity funds as soon as their portfolio experiences a valuation loss that seems too large.
The idea is to save what is left instead of continuing to live the agony of being a helpless witness to the deterioration of savings. Many plan to quickly return to the market when it resumes its uptrend.
A good risk, but not very profitable. Trying to take advantage of what is called the price effect, selling when the market is falling and buying back when the market is rising, is in fact the opposite approach to what an investor is supposed to take.
“You have to buy when prices are low and sell when they are high. You can’t fight the fluctuations and risks of the market. When the market goes down, we wait and buy back cheap to resell the stock when it goes up in value,” Neil Cunningham, CEO of PSP Investments, which manages $230 billion in assets for the pension plan, reminded me in a very basic way. federal employees.
The idea is to establish medium and long-term goals to achieve 5- and 10-year returns that take into account the ups and downs of the stock markets.
No one likes to see red lights go on, no one likes reading their investment statements to see holes suddenly appear in their life savings. But those who know and are able to tolerate these cyclical episodes will realize five years later that it was worth having patience and not succumbing to the reflex of selling everything.