It can be intimidating to invest your money in stocks. If you read the stock market press, they are always full of doom-and-gloom articles.
Take a look at any of the major players in the financial media and you’ll find negative articles near the top.
Many times it is about an upcoming bear market, or a recent stock market correction.
These stock market corrections may be scary (thanks to the media for scaring us), but if you know more about them, you can stay on course and protect yourself.
I will explain what a stock correction is and how long it might last. I also give some tips on investment strategies to help you stay sane in the face of possible madness.
Even after you have this information, you will probably still make rash choices. Many of these things I learned very early on in my investing career, and yet still panicked when there were corrections. So don’t be ashamed if you make mistakes.
Table of Contents
What is a Stock Market Correction?
How common are stock market corrections?
Stock Market Investing: Tips for Staying Sane and Prepared During A Correction
Will the stock market correct?
What is the average length of a stock market correction?
What is a Stock Market Correction?
What is a correction in the stock market?
This is when an investment’s value drops by 10% or higher after the recent high or peak. Corrections may occur to certain indexes, stocks or exchanges such as NYSE, Nasdaq and Dow Jones.
Wall Street analysts and stock traders attempt to predict these corrections. It’s difficult to accurately predict a downturn or when it will happen.
It is impossible to predict when a correction will occur in the US stock exchange, for how long, or how much it will drop.
After the correction territory has slowed down, and the period of time is over the data starts to indicate the reason for the bearish market conditions.
You can protect yourself against a correction in the stock market by analyzing and looking at data. It’s often best to continue to invest via dollar-cost-averaging and stick to your portfolio.
The market volatility or correction is usually caused by one of the following things, or a combination:
Companies’ failed earnings on top of an economic outlook that is negative
Tax loss selling is also known as year-end selling of losses
Technical analysis can reveal patterns that cause investors to act aggressively.
Emotional selling is triggered by fear of a market crash or financial crisis
Other causes may also exist, but the above list will help you understand that many factors or combinations can cause a market correction and create panic.
Stock market correction vs. stock market crash
Stock market crashes can cause recessions.
Before we move on to corrections and tips, it is important to understand the difference between a correction and a correction.
Stock prices drop by a large and sudden amount, often double the digital percentage. The trading volume may still be high, but more people are selling than buying.
This can happen in one day or over a longer period of time, such as a week. The Great Depression was triggered by the 1929 stock market crash, when the market dropped 48% in less than two months.
After many stock market crash, the market tends to rebound and trend upwards for a considerable period of time.
This article by The Balance is a good place to start if you’re interested in learning more about the stock market crash.
How common are stock market corrections?
How often do stock market corrections occur now that you understand what they are? Stock market corrections happen quite often and are very common. You should stick to your investment plan.
You can still protect your assets by changing your investment strategy as you age. However, it is common for markets and assets alike to be in a correction period.
According to The Motley Fool
Stock market corrections happen, on average, once every 1.87 year. Since 1950, there have been 37 stock market corrections that are at least 10%. This does not include rounding.
How long can a correction in the stock market last?
Many experts will attempt to predict everything that happens in a stock market correction. However, it is nearly impossible to get the information 100% correct. Each correction can last for a different amount of time, despite these common ones occurring at different times.
The Motley Fool shared the following based on great data and info:
Since 1950, the S&P 500 index has experienced 7,040 days of decline. The average time for a correction is 196 days in the last 68 years, given that there were 36 corrections.
After these stock market corrections there is usually a bull-market rally that erases the losses.
Remember that this isn’t always the case and sometimes corrections get worse (hello bear market). It’s hard to know what will happen.
It can be scary for investors who are not short sellers and who are bullish to think that their investments and money could lose value.
As the title of this article indicates, do not panic. The next section will give you some tips and tricks on how to remain calm during a correction.
New York Stock Exchange
Stock Market Investing: Tips for Staying Sane and Prepared During A Correction
What should you do when a correction occurs in the stock market if you have invested? The most common piece of advice is to not panic.
How often do novice investors actually follow this advice?
First, I knew this going in when I started. Guess what I did every time during the first year there was a correction and an economic slowdown. Well, I panicked!
I didn’t lose all my money by panic-selling, but I definitely lost some and I messed up the compound interest rhythm.
What can one do?
Even though you’ll still make mistakes, these tips will help you stay calm and prepared during a market correction.
Breathe deeply and be aware of your emotions
If you see flashing negative numbers, just breathe and stop paying attention to the markets. Instead, start thinking logically. It’s easier said than done but you must avoid emotional investing.
If you sell (or purchase) in a panic, or if you buy too soon into the hype of the correction, you may make an rash investment decision that you regret later.
Take a few deep breaths and leave your emotions behind before you make any decisions.
Don’t read the major investment media
Negative articles are common in the world of finance and investing because they sell and get clicks.
These “doom-and-gloom” articles are most popular during stock market corrections. Even as I was writing this article, I saw articles about an imminent crash and economic stagnation.
You should be aware of what’s going on with the markets. All the negative headlines and clickbait can lead you to poor investment decisions.
In my early days of investing, I was so taken by the frightening headlines that I didn’t know what to do. Media trap!
Due diligence is your responsibility
As with media advice, don’t blindly follow anyone else’s advice on a correction in the stock market or what to expect. This could be from a financial expert, a writer, a friend, or family.
It’s good to get advice, but you shouldn’t take it without researching what you heard.
You may lose money by following their advice. Never blindly follow advice without fully understanding it.
Cash ready for purchase
Stock market corrections can present a great opportunity to invest. You won’t know the exact share price for bonds or equities, but you can buy more at a good time.
You can make the most of your investment by leaving a part of it in cash.
You are ready to buy when the stock market goes on sale or has a correction.
While I love bull markets, a good correction in the stock market allows me to buy more of my favorite index funds.
You can also keep some money in the bank.
Although it’s great to be able to purchase items with cash during most corrections you don’t want to spend all of your money.
It is particularly true if you do not have the time to research or understand what’s going on in the market.
Cash is always a good idea to have on hand to protect you from not only major losses but also from bad purchases that you might not have thought through.
It may mean you miss some small opportunities, but you can keep your sanity when you don’t know what you’re doing.
In a number of cases, I chose to leave the money in the bank instead of purchasing. I was unsure of what I wanted to buy and I felt more comfortable keeping cash.
Now, I leave a certain percentage of the money in my investment accounts for other purposes than buying or investing.
What type of investor are you?
Your investing style will reflect your current life situation and what you choose to do or not do during a market correction.
As an example:
Long-term investor? Stay on track and use dollar cost averaging.
Short-Term investor? Prepare yourself to buy or sell. You’ll be more on your toes and ready to act.
Are you close to retirement? You should have a conservative, balanced investment account. However, you can take additional measures to protect your money.
Continue to prepare for future corrections
You should be ready for more corrections in the stock market, even when the economy is booming and the stock markets are booming.
It’s a certainty that the same thing will happen based on what I said earlier.
You will not be able predict the exact date or reason for it, nor how long it will last. You can only prepare yourself by knowing that it is going to happen. Use the tips provided above and mentally and financially be prepared.
Will the stock market correct?
Stock markets will correct themselves at some point in your timeline. This is a completely normal and unavoidable part of the stock market. It is not uncommon for the stock market to drop by 10 percent from its most recent high. This can be beneficial in overvalued markets.
If prices fall by 20% or more it’s called a “bear market” and could lead to some trouble on the markets in the future.
What is the average length of a stock market correction?
Stock market corrections can last from a few hours to several months. The average correction lasts between two and four month. This can also happen one to two time in a year.
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