Where’s the Stock Market Correction, Dude?

As the Dow Jones Industrial Average and the S&P 500 touch new records, it’s time to review the state of the current rally.  The S&P 500 has skyrocketed about 195 percent since bottoming in 2009. That makes it the fourth-best bull market since 1928 in terms of both duration and magnitude, according to Bespoke Investment Group (via the WSJ). The market’s very strength is a bit worrisome to some traders because there has not been a 10 percent correction in over three years—as a frame of reference, corrections usually occur about every 18 months. We got close in 2012, but the last “official” one was in the summer of 2011, when the first debt ceiling crisis was raging. According to Yardeni Research, here are the recent corrections:

• 2008-2009: -57% (510 days)
• 2010: -16% (69 days)
• 2011: -19% (154 days)
• 2012: -9.9% (59 days)

Of course, just because a correction COULD be coming, does not mean you should bail out. There have been times when corrections are rare. The market avoided a 10 percent decline from 1990 to 1997 and from 2003 to 2007. The bulls point out that with the Federal Reserve keeping interest rates low, little sign of inflation and corporate earnings continuing to climb, the bull could still have room to run. The bears note that any given moment, stocks could see a dramatic reversal of fortune, at least in the short-term.

Luckily, you don’t have to time the ups and the downs of the market. In fact, if you simply adhere to your diversified portfolio, you will be able to ride out the highs and lows of the market. Of sure, there will be those who will say that it’s a "stock-picker’s market" or that a managed mutual fund will be better able to absorb downward shocks, but that’s rarely the case; and the pundits doling out that kind of advice usually have a financial incentive to get you to buy whatever it is they are selling.

The benefits of building a diversified portfolio of low cost index funds have been proven over time. Presuming that you have created an allocation according to your risk tolerance and personal goals and that you rebalance on a quarterly or semi-annual basis, there’s no need to change a thing when markets are reaching new highs or correcting.