Portfolio Management | February 28, 2020

Market Corrections Are More Common Than You Might Think

After reaching new highs in February, the U.S. stock market plunged in the final week of the month in its fastest-ever correction of more than 10%. Amid this recent market downturn, it’s only natural to worry about your portfolio. But if you’ve invested in a robo-advisor, it’s important to remember that automated investing is designed to provide broad diversification based on your financial goals and tolerance for risk.

For example, while still subject to market loss, automatic rebalancing within Schwab Intelligent Portfolios® accounts helps investors stay on track with their strategic asset allocation plan, including a “buy low, sell high” discipline as markets fluctuate. Yes, it can be challenging to stay the course during periods of market stress, but that’s exactly the point of an automated rebalancing process—to help take the emotion out of your investing decisions.

While market pullbacks can be unsettling in the short term, they typically occur at some point in most years, even though the S&P 500® index has delivered a positive return for the full year most of the time. In fact, the S&P 500 saw market corrections of at least 10% in 11 of the last 20 years through the end of 2019, while ending with positive returns in all but five of those years. These types of pullbacks within an extended bull market are considered healthy and are expected to occur from time to time.

Since its inception in March 2015, Schwab Intelligent Portfolios has helped navigate market corrections in mid-2015, early 2016, and twice in 2018—helping investors maintain their targeted asset allocation through disciplined rebalancing while delivering competitive returns.

These types of big short-term market movements, both to the downside and the upside, often leave investors confused about the performance of their own investment portfolios. During these periods, it’s wise to take a step back and remember some important investing principles, including the benefits of diversification and staying focused on your longer-term plan.

Here are a few key points to keep in mind:

  • Markets are volatile by nature and are expected to encounter bouts of volatility from time to time. Investing in a diversified portfolio consistent with your objectives and risk profile is designed to help you reach your longer-term goals while smoothing the ride along the way.
  • Diversified portfolios include a variety of investments. The various asset classes each play a specific role in your portfolio. Stocks provide potential growth but come with higher volatility. Bonds can provide income—as well as diversification to help moderate volatility. Cash and cash equivalents can provide a stabilizing foundation and ballast during periods of turbulence.
  • Different investments move in and out of favor over time. Just because one asset class is doing well or poorly at any given time doesn’t mean you should include or exclude that asset class from your portfolio. Trying to time markets and chase short-term performance is one of the biggest mistakes that investors often make.
  • Progress toward your goals is more important than short-term performance. A diversified portfolio might outperform or underperform the S&P 500 on any given day or week. But one week’s returns are not a long-term investment plan. Ignoring the short-term noise and staying focused on your longer-term goals are among the keys to long-term investment success.

No one can predict whether the recent market correction will reverse or is the start of a longer-term downturn. But what experience does tell us is that panicking in the face of volatility and trying to time markets is one of the biggest mistakes that investors make. Instead, having clearly defined longer-term goals and maintaining a commitment to your plan can be key. And Schwab Intelligent Portfolios can help you stay the course.

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