It seems like only yesterday that I wrote an article about how you should ignore the media hype about the record number down days in a row (nine), and here we are with 9 up days in a row. On top of that, we have seen a steady climb in the market for months now. Since the aforementioned article, the S&P 500 is up over 10% (the Dow Jones Industrial Average, which is a worse index, is up over 16% in the same time period). Obviously, that rate of return (35% annualized) is not sustainable, so there will be a correction. Knowing that, though, does not mean taking drastic action: rebalancing regularly, which we do, will soften the blows. And, that is the whole point of long-term investing: to take advantage of the risk inherent in investing and, over the long term, benefit from the excess returns that come with a diversified portfolio.
Bottom line: when (not if) we have a 5-15% drop in the stock market, don’t panic! It’s exactly what you as a rational, long term investor should want. Just as an occasional fire is good for the health of the forest, the same can be said for periodic corrections which clean out the euphoria and bring back equilibrium in prices. In the meantime, enjoy the ride up!