Volatility, Cash and it's future location.

Macro Perspectives: Mon 31 Jan 22

As we end the month, let's step back and get some perspective on stock market declines.

What a difference a month makes. In just thirteen days, the broad stock market (the S&P 500) has declined (peak to trough) 12% from record highs - technical correction territory.

Corrections are part of investing. The broad U.S. stock market does, over the long run, go UP. However, it's not in a straight line, there are dips along the way.

Since 1946, the S&P 500 has had a 10% decline about once a year, and a 5% dip a couple of times a year, on average.

With this in mind, we often hear interviews of money managers during periods like this, and the question is asked "are you getting defensive?"

That's the exact opposite of what they should be asking. When stocks are up 15-20%, and acknowledging that the long-run average return for stocks is 8%, that's the time to play Defence. When stocks are down 15-20%, that's the time to play Offence.

The reality is most investors should see declines in the U.S. stock market as an exciting opportunity. A snap-shot of Friday’s action below.

Here's why: Most average investors in stocks are NOT leveraged. With that, they should have no concern about stock market declines, other than saying to themselves, “what a gift,” and asking themselves these questions: “Do I have cash I can put to work at these cheaper prices?" And, "where should I put that cash to work?”