Self-control, along with intelligence believe it or not, is one of the characteristics most commonly associated with success according to research.* There are also countless parables across the historical literature which exemplify its importance. From the temptation of the apple in the Garden of Eden to Odysseus' journey past the Sirens while strapped to a mast, we learn to revere those who have the ability to restrain themselves. Even in the modern day investment lexicon, we worship those gurus who have the fortitude to stick with their plans through thick and thin.
In this volatile market, self-control is an utmost requirement. It is typically after a drawdown such as the one we've experienced since July that investment strategy begins to come into question. It's hard to believe we've been in this correction--a drop of 10% from the previous high--for almost 6 months. The S&P 500 Index peaked on July 20th, 2015 and as of the close on January 15th, 2016 has recorded a -10.7% decline. Despite all the planning we've done with a financial advisor, and all the pearls Buffet-esque wisdom about investing for the "long-term," the desire to hit the sell button is omniprescient.
In the grand scheme of stock market history, what is a 10% loss over a 6 month period anyway? It's quite common is what it is, and well within statistically significant bounds from an empirical perspective (see a brief explanation at the end of this post**).
When looking at the 50 worst drawdowns, which range from an -83.7% decline in the Great Depression to a -5.4% decline over 2 months in 1951, one finds that drawdowns occur every 25 months on average (measured from the trough of the previous downturn to the start of the next downturn). In the 115 years since 1901, the market has actually spent 30 years cumulatively in some sort of drawdown. Fortunately, it's also spent 85 years advancing--in other words, a whole lot more advancing than declining.
Importantly, the average length of the declines is 7 months. We find ourselves at right about the average drawdown length--6 months currently. Of the top 50 declines, 33 were less than the 7 month average.
The lesson. Nobody likes living through downturns and wathcing those account balances decline. It's possible capitulation (the bottom) could be coming soon. Its also certainly possible that the stock market could well drop another 10% from here, maybe more. A number of pundits wouldn't be a surprise that a recession hit in next year or so (market drawdowns tend to precede recessions because markets are forward looking).
But, given how long these drawdowns last and the unpredicatble nature of timing market bottoms, its probably too late too sell and you won't be able to pick the bottom. Stick to the plan. Add money incrementally through regular investment programs. Rebalance annually or quarterly. Rinse and repeat.
** The arithmetic average 6 month return for the S&P 500 from 1901-2015 is 5.45%. The standard deviation of the 6 month return is 13.39%. This suggests the current move is just outside of a one standard deviation move and occurs about 30% of the time. In other words, its common.