8 Things to Know About a Stock Market Correction 📉
When you check the lost value of your investment account, it’s easy to feel scared and upset. But before you panic, here are 8 things you need to know about a stock market correction. 📉
1. Stock Market Corrections Are a Common Occurrence (1:38)
Keep in mind that stock market corrections are common. They happen fairly often as markets rise and fall over time. One study has shown that corrections of ten percent or more occur every 357 trading days, or roughly every 1.5 years.
2. They’re Usually Driven by Emotion (2:24)
A stock market correction typically follows a recent increase in value, and it’s usually driven by emotion. When you think prices are going to rise, there’s an anticipation of perceived gains, and you buy more stock hoping to make more money. The buying of stock eventually slows, and the price begins to fall as you and other investors start selling your shares to lock in your gains. This buying and selling based on perceived gains and losses is the emotion that drives a stock market correction.
3. A Stock Market Correction Typically Doesn’t Last Long (3:11)
When you’re in a stock market correction, remind yourself that it won’t last long. Looking at the corrections the market has seen since 1950, 61% percent lasted 104 or fewer days. There is a potential for short-term losses during these often brief periods of corrections, but the market leans toward stability.
4. Stock Market Corrections Are Difficult to Predict (3:40)
Analysts can add up the number of stock market corrections and arrive at an average to get an idea of how often they occur. However, the market doesn’t adhere to the law of averages. The reality is that you can’t predict when a correction will happen.
5. We Only Know Causes After the Stock Market Drops (4:13)
The market can fall for many reasons, including a weakening economy, the emotional response of investors and their perceptions, or the fear of loss. Many factors have the potential to cause a drop in the market, and no one can ever know what the market will do until after it happens.
6. They’re Not Impactful in the Long Run (4:50)
Just like a speed bump, a stock market correction has little impact on your route in the long run.
Though it won’t have much of an effect on your long-term investments, short-term traders tend to be more driven by their emotions. These knee-jerk reactions can cause significant loss during a correction period. Long-term investors, on the other hand, can use this as an excellent opportunity to reassess their portfolio.
7. When the Stock Market Drops, it’s a Good Time to Invest (5:34)
The reduction in price during a correction period could give you an opportunity to add investments from high-quality companies. Trying to time the market is rarely a good idea, but you can use this fall in value to buy stocks that might have otherwise been too expensive.
8. Dividends and Value Stocks Tend to be Best (6:15)
If you want to build a more resilient portfolio, dividend and value stocks tend to perform the best during an economic slowdown. That’s because high-quality dividend and value stocks will generally lose their worth at a slower pace than growth stocks.
During the time of a stock market correction, it’s important to remember not to panic. Most sound investment plans are designed to endure market volatility and perform according to the appropriate risk level of your portfolio. Since they are difficult to predict, if you have a long-term investment strategy, sometimes the best reaction is to stay the course.