Stock market corrections are inevitable and a part of investing. With the most recent stock market correction underway of around 5%, I thought I try to put it into perspective. They are also something that most investors don’t want to experience or think about. I addressed this issue in my blog posts, The Good, The Bad and the Ugly Reasons To Change Your Portfolio and Fear & Greed: Still The Great Motivators.
For about the last six months the stock market has steadily moved up. At 13,000, the Dow hit a psychological barrier, and did not advance until recently. What was more important was the fact that the NASDAQ reached 3000 for the first time since 2000. So it’s only normal to take a breather, like a runner that slows down to catch his breath.
So let’s put this most recent correction into perspective. A look back at stock market history shows that the frequency, length and intensity of a correction can vary widely. According to Capital Management Research, since 1900 here are some numbers:
-5% Correction happens 3 Times per Year and averages 47 days
-10% Correction happens 1 Time per Year and averages 115 days
-15% Correction happens 1 Time every 2 Years and averages 216 days
-20% Correction happens 1 Time every 3 1/2 Years and averages 338 days
What are the lessons we can learn from market corrections?
1. No one can predict when a correction will happen. I always get calls where clients think they have a gut feeling and it’s time to sell everything. Get yourself an all-weather portfolio that can handle the inevitable storms that the markets will throw your way.
2. No one can know how long it will last. Most of the market corrections are relatively short in duration. Most lasting less than a year. The key is to stay focused on your goals and not worry about how long a correction will last. View it as an opportunity to buy low and get a great deal!
3. No one can consistently predict the right time to get in or out of the market. Just as it is hard to know when to get out of the market, I think it is equally, if not harder to predict the right time to get back into the market. You should remain invested. If you do not need the money in the next 5 years there is no point in trying to time entrances and exits. What if you are wrong and miss some potential recovery?
If stock market corrections still freak you out, you are welcome to write to me at firstname.lastname@example.org, and if you need someone to discuss your concerns in person feel free to call me for an appointment at (859) 225-2596.