A Disciplined Approach Leads to Investing Success

Market pundits are constantly making predictions about the near-term direction of the stock market. Seemingly everyday we see predictions of the next market correction, a coming recession or even worse.  With so many predictions made and the vast majority of them wrong, why these pundits continue to pontificate is beyond us.

It is a fact that financial markets do go down from time to time.  Nothing goes up in a straight line forever.  For many, especially those who might have missed out on the 184% gain in the U.S. stock market since March 2009, the recent new highs are a sign of a market top and forthcoming correction, recession or even a bear market.

When the latest market rise is compared to other bull markets over the last century or so, it is neither too old nor too stretched. This does not mean that we are predicting that U.S. stocks will enjoy gains for another 100 months or go up another 100% unabated, for it is safe to say that we will experience some volatility along the way over the next 100 months and before the next 100% gain.  In fact, according to Crandall, Pierce & Company, since 1900 the Dow Jones Industrial Average has experienced a correction or bear market 37.5% of the time.  Of course, this isn’t necessarily something to fear or try to avoid.  This is just the way financial markets work.

Market volatility can be used to an investor’s advantage – after all, who doesn’t like to purchase valuable items at 10%, 20% or even 40% off?  Those with a short-term focus seek to avoid volatility and will often sell into a market decline, while those with longer investment horizons can take advantage of the market’s frequent swoons, often buying the shares at fire sale prices from those rushing to exit.  At Madison, we look to use the market’s unpredictable, yet expected, volatility to our clients’ advantage.  We do this by acting with discipline during times of market distress and rebalancing back to pre-determined targets.

“Far more money has been lost by investors preparing for corrections or trying to anticipate corrections, than has been lost in corrections themselves.”   Peter Lynch, Legendary Investor