A market correction?

There would be absolutely nothing abnormal should the market drop anywhere from 5% to 10% before the year’s out. The question is: from what height?
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Yes! But from what level?

Concern over a downturn in the markets is a hot topic these days, and the subject of much discussion in the media. But how abnormal would a decline be? The US market only experienced a 2.8% drop to date in 2017. The only previous year in which a lower dip was recorded was 1995 at 2.5%. That said, what would be a “normal” decline over the course of a year? We’re not talking about the final figure at the end of the year here, but rather about the biggest one-off decrease during the year. To find out, we looked at all the downturns that have occurred since 1929, always within a calendar year. Then, to avoid distorting the average value of these declines, we eliminated the dramatic drops that took place in 1929, 1930, 1931 and 2008. The average decline during a given calendar year came out to… -14.9%! Once again, this represents the average drop over a one-year period, not the final result – that’s positive most years!

So what conclusions can be drawn from this exercise? There would be absolutely nothing abnormal should the market drop anywhere from 5% to 10% before the year’s out. The question is: from what height?

Stay the course. If you’re losing sleep over a potential market correction or if you simply want to be more prudent, you could increase your cash weighting to approximately 10%-15% of your overall portfolio. Then, if the markets do drop, you can buy in at a better price. And should the market gain, say, 25% before the next downturn, you will have at least left a good portion of your portfolio to grow.

The Claret Team

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  • Claret Asset Management specializes in offering portfolio management services to high net worth clients. We are completely independent and free of conflicts of interest. Claret was founded in 1996 with the objective of answering the growing needs of private investors.

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