Unfortunately, this one may smack a few investors in the face. Why? Well, we haven’t had a substantial correction in quite some time.
By definition, most would agree that a correction is 10% or more. In my previous article, The Most Dangerous Time In The Stock Market, I talked about being lulled to indifference by a long stretch of good times. So when a correction takes place after these long calm times, investors tend to freak out.
While in the middle of these declines, it’s absolutely impossible to judge whether it’s a slight dip or the beginning of a more prolonged corrections.
First, I want to share some statistics regarding how often the market corrects. Then, I will give you some suggestions on how to take advantage of the correction without the freak out part.
Here are some stock market correction stats according to Capital Management & Research:
- 10% Corrections happen once per year and last over 100 days
- 15% Corrections happen once every two years and last over 200 days
- 20% Corrections happen once every three and half years and last over 300 days
Remember, each correction will be different. They will have different lengths, frequencies and intensities.
Now I want to share some tips for avoiding the freak out and taking advantage of the correction:
1. Invest regularly. Whether times or good or bad, you have the ability to make additional contributions to an IRA or a 401(K). Adding money during a decline may allow you to buy more shares while the market is down.
2. Avoid jumping in and out. Market timing is a fool’s game. You will do more damage getting in and out of the market. If you are long-term investor, stay put and weather the storm. Getting out when times are bad is fairly easy. It’s knowing when it’s time to get back in that is the challenge.
3. Consider international investments or alternatives. If you think that the U.S. market is not doing well, why not add international investments to your portfolio? Not every country on the planet is in corrective mode. This may be the portion of your portfolio that performs well and helps your overall return. Consider adding some alternative investments, like commodities, managed futures or REITs. Most of these don’t move with the market. They do their own thing and may make money when the stock market is declining.
4. Talk to your financial advisor. Your advisor will definitely have some words of encouragement that will make you feel better. An advisor can give you the perspective you need when you feel the urge to freak out over a market correction. Have the advisor do an update on your financial plan. That way you can see just how much a correction affects your long-term goals.
Remember, market corrections are a part of investing, like it or not. Stick with your plan. If you like my article, subscribe here for free! I’ll have my virtual paperboy throw them in your inbox every Friday!
Investing in alternative investments may not be suitable for all investors and involves a high degree of risk, including the risk of a substantial or total loss of investment . They typically have limited liquidity or may be illiquid and there may be significant restrictions on transferring interests. An investor should thoroughly review an alternative investment’s offering documents with the investor’s financial, legal and tax advisor to determine whether an investment in the alternative investment is suitable for the investor with respect to their investment objectives, financial circumstances and tax situation. There are unique risks to international investments including, but not limited to transactions costs, liquidity, currency and political risk. Although emerging markets can offer stronger growth opportunities, they are often more volatile than developed markets. As such, they are suited to investors with longer-term investment horizons.