There comes a time when the stock market's talking heads on television start expecting a correction because of the steady rise.
A correction is what? An asset's worth or the value of an entire market index is just slightly declining. Ten percent to twenty percent drops from recent highs are often considered corrections. Your favorite S&P 500 stock may go down in value. Commodity prices may fluctuate.
For How Long Do Corrections Last?
Financial advisor and CFP Ed Canty believe that a correction is often a short-term move lasting a few weeks to a few months. The S&P 500 has taken four months since World War II to recover from a downturn.
Canty explains, "They're never the same." The stock market fell for nearly three months from Covid-19's February and March 2020 slump. Meanwhile, the September 2020 downturn was short-lived.
What Is the Difference Between a Bear Market and a Correction?
It's more severe than a correction and lasts a longer period. Spear defines a bear market as a market fall of at least 20%. This is a longer-than-normal downturn, with bear markets lasting 14 to 16 months.
It is not uncommon for bear markets to be the outcome of a major shift in investor attitude. If you're looking for something more long-term, you're looking for a bear market.
What Can You Do If the Market Goes Down?
"You're going to perform well to stay the course during a correction if you have a diversified, disciplined strategy," adds Spear. According to this adage, investors must use their wits and not their guts while making investments.
We're all going to experience market corrections at some point, so here are some tips on making the most of your money at that time.
· Recognize what is causing the correction
A correction can be caused by long-term unemployment or increasing loan defaults, or by a disappointing earnings report, or another dramatic event in the case of a particular stock.
Hogue suggests that you first take a step back and analyze what drives the correction. Changing trends in the stock market might mean that you should get ready for a prolonged downturn or perhaps a bear market.
· Create a Portfolio That Suits Your Risk Tolerance
Canty advises investors to be proactive with their assets before a market downturn occurs. A well-balanced asset allocation can help you achieve your financial goals while minimizing the risk you are willing to take.
As a result, you'll be less inclined to react emotionally to a market drop while making financial decisions. As long as you don't modify your investing approach during a correction, you'll be OK. Those with aggressive portfolios can lock in their losses in this way.
There's a good probability of planning for scenarios like this in your financial strategy. For example, if you're averaging dollar costs, you're wagering that market downturns will occur.
· Keep Cash on Hand for Dips
Ensuring you have enough cash on hand to get you through any short- or long-term downturn in the market without touching your investment money is an important part of successful investing.
Hogue advises that you should keep a slush fund for rainy days so that you may profit from price drops. "If prices fall, think about ways you may take advantage of the scenario by investing more each month to purchase at cheaper pricing," advises Hogue of Hogue Capital.
"The fact is that prices usually go back up, so try to avoid pulling your money out when prices drop," says nearly a century of stock market experience.
· Check Your Risk Profile Every Year
The level of risk you are willing to face with your assets will alter over time. As a result, Spear suggests that you review your risk profile each year and make modifications that aren't influenced by stock market performance. Rebalancing your assets and maintaining an acceptable risk profile are both critical.
According to Spear, you may want to lower your stock holdings in your portfolio as you get closer to retirement. "When you rely on other assets to pay your living needs, the lows won't have as big an impact on you."
Examples of Corrections in the Real World
It is not uncommon for the market to have a correction from time to time. Stocks in the S&P 500 index have fallen by 18 percent since 1980. The five bear markets that followed these declines tended to be precursors of recessions.
Some bull markets persisted or converted back into bull markets, which are often indicative of economic growth and stability.
Summary
Market corrections are an inevitable component of business cycles, and staying the course through a market downturn is the best strategy.
Stay true to your investing strategy, and don't allow yourself to be swayed by fear. Remember that corrections are usually short-lived, so selling during a decline does little to improve your portfolio and potentially lock in your losses.
As an alternative, look at a correction as a chance to acquire more assets at a reduced price and benefit from the stock market's eventual rebound.
