UPDATED ON: Oct. 15, 2014.
Is the tide finally turning? As of today the S&P 500 has been on a nearly 30-day slide, and the S&P TSX has hit correction territory, declining slightly more than 10% since the start of September. Finally, after years of fairly steady increases, the market is in decline, and fears of a widespread market correction in the making are emerging.
MoneySense blogger and investing expert Norm Rothery notes that the market is impossible to predict in the short term. This could be a minor blip, or the beginning a long-term global decline. But he says that it wouldn’t be unreasonable to expect a market pull-back at some point.
The Shiller P/E ratio—calculated by dividing the current level of the S&P 500 by the 10-year average of real earnings—indicates that U.S. stocks are expensive. The current Shiller P/E is 25—roughly 50% higher than the historical mean of 16.5. According to financial theorist Cliff Asness, that means the average real annual return on the S&P 500 over the next 10 years will be a measly 0.5%.
3.4 Average number of years between bear markets since 1929
Depressing news, but it doesn’t mean you should rush out and sell your stocks. Indicators like Shiller’s are insightful, but they can’t help you determine exactly when prices will come back down to earth. For stock investors wondering what to do right now, Rothery’s advice is to focus on fundamentals: “Are you following your strategy? Are there stocks you have that you may have neglected or forgotten about in your portfolio? If they don’t fit your approach, maybe it’s time to lighten up on those stocks.”
As for Couch Potato investors, index investing expert Dan Bortolotti’s advice is simple: stick to your asset allocation and rebalance every six to 12 months. “If your equity component is split between Canada, U.S. and international, now is the time to rebalance,” he says. If you use actively managed balanced mutual funds, you don’t have to do anything at all.
And while nobody knows when the markets will drop, there is one thing you can do in case the bull runs out of steam. “Investors have to expect lower returns,” says Rothery. “The best thing to do is save more.”