A market correction is a decline of at least 10% of a stock, bond, or commodity market index from its highest point – and we haven’t had one in an abnormally long period of time. Market corrections are often confused with an actual bear market and with drops of 20% or more. Although a market correction can be a precursor to a bear market or a recession, it is not always the case. To put this in perspective, 123 market corrections occurred between 1900 and 2013, one per year on average.
Whereas, bear markets have occurred 32 times during the same period averaging one every 3.5 years.
I’ve never seen an environment quite like this one. Play it cautiously, and in the event of a market correction, here are five things to consider:
1. Be patient. It is natural to be concerned about how a market decline might affect your current investments, but now is not the time to make any spur of the moment moves. Stay the course and stay in the market, keeping in mind that corrections are temporary and often lead to higher gains once they are over.
2. Don’t overthink it. Stock market corrections occur regularly as part of a normal market cycle.
3. Fight your instincts. The rules of investing can seem counterintuitive. While your instincts might tell you that it is better to invest in a rising market than a falling one, the markets have consistently shown the opposite to be true.
4. Stay diversified. Despite a significant decline in value of your stock holdings during a market correction, bonds should maintain their value, so it is important to have a healthy mix in your investment portfolio.
5. Work with your financial advisor to reassess your situation. Although moving your investments may not be advisable during a market correction, it can be a good time to review your financial plan and assess whether the amount of risk you have is appropriate for your situation. Having a well-constructed investment strategy can give you confidence for the future when the going gets tough.
Market corrections are generally temporary and typically end when the price of a stock or bond bottoms out and investors start buying again. Despite a general perception that a market correction is bad, they can be healthy for a stock market. Market corrections provide the opportunity for the market to digest recent gains and for investors to gain a better understanding of how comfortable they are with market risk and/or to potentially add stocks to their portfolios at discounted prices.
It is important to note that the stock market, while fairly volatile on a short-term basis, has a strong track record of long-term success. Since 1980, market corrections and the S&P 500 have averaged about 14%. However, looking at the overall picture each year, 27 of the last 36 years ended positive with an average return of 11.4%. As history has shown, those who chose to stay the course are rewarded for their patience more often than not.
Calvin Goetz is a financial adviser, retirement wealth strategist, co-founder of Strategy Financial Group and author of “Climbing the Retirement Mountain.” Goetz is an Investment Adviser Representative who holds the Series 65 securities license, is life and health insurance licensed in the state of Arizona and is a member of Ed Slott’s Elite IRA Advisor Group™ and the National Association of Insurance and Financial Advisors (NAIFA).