What is a stock market correction and how does it affect me?
To the untrained ear, a stock market correction might sound harmless, but the term is used to define a state when the stock market index falls by 10% or more. Now, a correction is not necessarily a sign of a bear market, but it could be the start of one.
An important thing to remember is that the reason a stock market dip of 10% or more is called a “correction” is that, historically, the dip corrects after a short period of time and the index returns to its longer-term trend upward. Actually, it is the sign of a healthy market. Every once in a while it knocks out any excess that has creeped into the market.
How stock market corrections affect you
No investor can predict with certainty whether a market correction will reverse and resume its course of growth or continue to trend downward and turn into a bear market. Since 1943, there have been 23 corrections; only 12 of them turned into bear markets. This rate of corrections has decreased since 1974, after which only five corrections led to a bear market.
In short, you should not worry that a stock market correction will lead to a bear market, but it is a good idea to always be prepared for a bear market, even if the market is growing steadily.
Here are some steps to consider taking during a market correction:
- Do not panic — As mentioned earlier, a correction can reverse itself and the market will continue growing. Avoid panicking and selling your investments out of fear of a bear market when your investments could resume their growth within a few months or less.
- Assess your risk tolerance — You might have a higher risk tolerance level when the market is healthy, but if the market looks like it is starting to turn down, you might want to readjust your risk tolerance and shift your investments to safer options. Your risk tolerance should not be based on whether the market is going up or down at any given time. It should be your risk tolerance for the long term, not the market direction.
Evaluate and rebalance your portfolio regularly. Even during a bull market, you may need to rebalance your portfolio to help keep you on track for growing your wealth and reaching your savings goals. Rebalancing causes you to sell investments that have increased and buy those that have not increased as much or may have even decreased. You are selling high and buying low, because as different markets rotate, your losers today become tomorrow’s winners.
- Talk to a financial advisor — Before making any changes on your own, you should talk to a financial advisor about your current strategy and making room for flexibility to get through a potential bear market. A financial advisor can review your current strategy and help you rebalance your portfolio according to your risk tolerance and your goals.
This is especially important if you are nearing your retirement or reaching a long-term savings goal. A financial advisor can help you get the most out of your savings during a correction or bear market.
Talk to a ProVise CFP® professional about protecting your investments during a bear market
A stock market correction does not always lead to a bear market, but it is always a good idea to be prepared for what to do when it does. Not having a plan in place ahead of a bear market is like driving without a seat belt. You may be a safe driver, but accidents happen and you need the protection to help keep you safe. During a bear market, you need to have a plan that can help you get the most out of your investments so you can stay on track for reaching your goals.
At ProVise Management Group, our CERTIFIED FINANCIAL PLANNER™ professionals can get to know you and your current financial circumstances, goals, risk tolerance and personal values to help you develop a plan that works for you. We can also create a written plan for you at a fiduciary standard of care. All our written plans come with an unconditional money-back guarantee. If you are unhappy with your written plan, you can return it to us, and we will refund 100% of the fee paid.
Are you ready to talk to a professional about saving for your retirement? Contact ProVise today to schedule a complimentary consultation.