Have you ever felt that you have lost a golden opportunity while investing in a trending market?
Don’t worry the trend won’t last long and there would soon be a correction, translation, you will get the opportunity to invest again!
Yes, you read it right!
When a stock index falls by more than 10%, it is often said to have entered “correction” territory. It’s a common phenomenon yet investors see it as a nerve-wracking drop.
What does a correction mean?
The most recent stock market correction, began from Feb. 19. U.S. markets have quickly gone from setting a series of record highs to a volatile churn in which stocks are conceding huge chunks almost every other day.
On March 9, for instance, the S&P 500 dropped 7% at the open as the coronavirus outbreak spread, oil markets looked primed for a price war and bond yields continued to fall to record lows. That fall was deep enough to trigger market circuit breakers that stop trading for 15 minutes, and the index closed more than 7% lower.
It’s obvious for investors to get scared when facing any sort of market downturn. That said, market corrections happen more than you might think. Here, we look at things you should know about stock market corrections to better help you deal with the current one.
What should I do now?
Worrying excessively about a bear market is futile, but being prepared for one is always a good idea.
Start with a written financial plan. This can help you with a balanced portfolio. It can also calm your nerves and make it easier to stay the course when markets get bumpy.
Assessing your risk tolerance. It’s considerable to take risks when the market is rising, but market downturns sometimes can be a wake-up call to consider adjusting your target asset allocation.
This gives a clear picture to bear with the financial and emotional losses to handle.
Jarvis provides the investor profile questionnaire which can help you determine your investor profile and match it to an appropriate allocation.
Rebalance regularly. Market changes can skew your allocation from its original target. Over time, assets that have gained in value will account for more of your portfolio, while those that have declined will account for less.
Rebalancing means selling positions that have become overweight in relation to the rest of your portfolio and moving the proceeds to positions that have become underweight. It’s a good idea to rebalance at regular intervals.
Take your life stage into consideration. If you’re a younger investor saving for a goal that is 15 or more years away, you have time to potentially recover from a market drop.
However, the picture may change for investors nearing or in retirement.
Regular rebalancing and appropriate diversification are important for you at this stage, and your risk profile typically will become more conservative as retirement approaches.
If you’ve recently retired and begun to withdraw from your portfolio, you also should be aware that poor returns in the early years of retirement can have a very negative effect on a portfolio; consider taking steps to avoid selling assets in a down market, such as reducing your planned withdrawals or postponing large expenses.
What if you are new and want to invest in the stock market?
If you haven’t invested yet and looking forward to grab an opportunity this is the best time to gather your corpus and wait patiently until the right time.
Why is correction a boon?
If you have a glimpse at the stock market for an extended period of 10 years, there is an interesting finding. The Corrections that occurred was a catalytic effect of indicators such as interest rates or currency valuation.
It’s much more common for a correction to happen because investors are trying to predict future events and hedge their bets against what might happen, rather than looking at what is currently going on.
There are always two dominant emotions in the market fear and greed also a lot of it is “the fear of unknown” which makes the market bumpy with frequent pullbacks which then leads to a correction.
Indeed, much of the current pullback has come amid a nominally low case count of coronavirus in the U.S. That’s because investors are acting out of anticipation of what they’ve already seen in other countries, which is case counts and deaths increasing, and economic activity being disrupted.
As sprouts and veggies form an integral part of healthy diet, corrections plays a similar healthy role in the markets.
After all, nobody can survive forever living on a sugar high. The same goes for a stock market which indirectly settles as a result of accounting tricks.
It’s crucial to remember that periods of falling prices are a natural and healthy part of investing in the stock market.
One risk that some investors may be exposed to is the risk of falling short of reaching a long-term financial goal. Investing too conservatively may contribute to not reaching an accumulation target.
Remember that despite several down cycles, stock prices have historically risen over longer time periods. (Past performance, however, does not guarantee future results.)