Imagine…the day has come to an end, you’re exhausted and ready to flop on to the couch for what is left of the evening. You flip on the TV and are instantly bombarded with reporters talking about how the stock market plummeted that day with images of stereotypical floor traders hysterically yelling “sell, sell, SELL out of the market”. Market corrections are happening. Naturally, you frantically grab your computer and log into your 401(k) account to see for yourself and you notice your account balance is down 5% for the day. How are you feeling about that?
Odds are you feel panicked and worried that your retirement is in jeopardy. You aren’t alone in having this feeling. Seeing a big loss on your statements can be nerve-racking. The thing to remember, however, is that a loss on paper is just as arbitrary as thinking you can never drive your car again once your gas tank reaches empty. It’s not the end of the world and if you don’t sell everything in a panic your investments will be back to normal in a matter of time, it just may take some patience.
There are a few important facts about market corrections that you should always keep in mind:
- Market corrections are inevitable. No matter how much of a market-timing wizard you believe that you are they can’t be avoided. What goes up must come down, and vice-versa with stock markets.
- Since 1928 there have been 26 market corrections, where the market dropped between 10-20%. The average length of each correction is 136 days. While that sounds like a long time it is actually quite brief compared to bull markets where markets grow for 464 days on average with gains of 55.86%. While some market corrections may be far worse than others and may take longer to recover the markets always recover and then some.
- Market corrections are beneficial to investors in the long term. If you continue to invest through a market correction you will bring down your average price-per-share getting you a higher number of shares for the same price. (See: What investing and ice cream have in common). This could lead to greater upside potential once markets begin to recover.
Many aspects of investing are counter-intuitive in that you must often times go against your initial instinct. It is critical for your financial well-being to resist the urge to sell during a correction. Rather, you should do one of two things. You should stop frequently checking your balances as this will create more anxiety during corrections – instead reference the flowchart at the top of this page if you’re feeling uneasy. The other option, if and only if you can afford to, is increase your contributions to your account and take advantage of the falling stock prices. If you do these things you will have nothing to fear during the next correction. Remember, in the long term market corrections shouldn’t be feared, rather, they should be embraced. They can’t be avoided but whether or not they have a negative impact on your investments in the long run is solely in your power.
So print this flowchart out and hang it on the fridge and share it with your friends…they’ll need it someday.
Published on October 17, 2016