It’s hard not to panic when that happens. And it’s tempting to react and want to pull back.1
Many people give in to that temptation.2
Informed investors don’t.
Because they know most market corrections are short.
In fact, over the past 70 years, corrections have been getting shorter and shorter. These days, the average correction is over within four months.3
Those are just a couple of reasons why you shouldn’t panic over corrections. Below are more.
If you know these facts about corrections, you can keep a level head and healthy perspective whenever the markets retreat. That can help you avoid overacting. It may even open your eyes to new opportunities.
Corrections can cool off overheated markets before they head into "bubble" territory. They can also help savvy investors pick up solid investments at bargain prices.
A stock market correction happens when an index like the S&P 500 falls 10% or more from its high. Though stressful, corrections are an inevitable, natural part of the market cycle.4
Since 1950, there have been 37 corrections in the S&P 500. On average, that's a correction every 1.86 years.3
GREED can cause investors to irrationally chase performance while fear can cause panicked selling when markets turn.
OVER-OPTIMISM during upswings can mislead investors into taking on too much risk, priming markets for a retreat.
UNCERTAINTY around political, economic, and/or natural events can alarm markets, tempting investors to pull back.5
Scary headlines get attention and make the media money. Tune out the noise and focus on your goals—not theirs.
Corrections are periods of high market volatility, and the good days and bad days tend to cluster. If you panic and sell, you're likely to miss some of the best days of market performance.6
When markets fall, investors usually pull back at the wrong time. If they reenter, it's usually well after a rebound window has closed.2
You chose your investment strategies to support your needs and objectives. Market turmoil doesn't change that.
No one likes losing. And no one’s immune from it. In the inevitable correction, that can be a rough reality.
But it’s not the end of the story. Correction panic doesn’t have to upset your portfolio.
You’re smarter than that.
Remember, you chose your investment strategies to support your needs and objectives. Market turmoil doesn’t change that.
During a market retreat, that can be hard to keep sight of—especially when you don’t know if you’re dealing with a short-term dip or a prolonged pullback.
So, what should you do when markets retreat?
Take a deep breath.
Don’t trip over yourself trying to make sudden moves. Ignore the media hysteria.
If you’re feeling nervous, turn off the TV. Stay off the internet.
Then, remind yourself that market corrections are normal and healthy.
Think about the solid, rational reasons you had for choosing your investments. And, remember, history shows us that corrections and recoveries come unannounced.2
If you can stay calm and can see past the temporary shakeups, you can potentially be in a much better position to enjoy the eventual recovery.
As an adviser, my job is to provide a calm, reassuring presence during times of turmoil and uncertainty. I’m here to help my clients avoid panicked reactions and stay focused on the big picture.
If you’re having a hard time staying cool when markets retreat, let’s talk. Call me at (805)250-4552.
Now may be a good time to reassess your financial strategies and risk tolerance. If you need to make prudent changes or switch gears, I’ll let you know.
Eric Maldonado, CFP®, MBA Aquila Wealth Advisors
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