Investing your money in the stock market can seem a bit overcomplicated and a bit scary. Especially if you pay attention to the financial media, they love the doom and gloom articles about the stock market.
Seriously, take a look at any major player in the financial and stock market media, you’ll quickly find some negative articles at the top of the feed.
Many times, it’s about a pending or maybe current stock market correction.
And sure, these stock market corrections can be a bit scary and intimidating (thanks media for the scares), but you can protect yourself and stay the course if you understand corrections further.
Below, I cover what a stock market correction is, how long a correction will last, and some investing tips to stay sane during the madness that might ensue.
What is A Stock Market Correction?
So what exactly is a stock market correction? It’s simply when investments decline in value by 10% or more after a recent high. Corrections can happen to specific indexes, individual stocks, or one of the exchanges like NYSE, Nasdaq, etc.
Analysts and active stock traders try to predict when these corrections will happen, but generally it’s quite impossible to get it completely accurate.
Areas like when a correction will happen, how long it will last, how much will it drop, are all predictions that cannot exactly be known. Usually after a correction period is over, then the data will point to what caused the downfall.
Of course, looking at the data and analyzing can also help you protect against a correction to some extent. But many times, it’s best to stick to your diversification and continue investing via dollar-cost averaging.
Typically, what causes a stock market correction can be one of these few things or a combo:
- Failed earnings from companies on top of a negative economy outlook
- Year end selling from losses, known as tax loss selling
- Investors technical analysis may indicate patterns, that trigger them to sell aggressively
- Fear of the market crashing, triggers emotional selling
There are other potential causes besides the above, but this gives you a quick understanding that many variables or combos can trigger a correction in the market.
Stock market correction vs. stock market crash
While stock market corrections are common (more on that below), there are also stock market crashes. Although a bit more rare, I thought it would be important to share the difference compared to a correction before we get further into corrections and some tips.
When the stock market crashes, this means a huge and sudden drop in stock prices happens, usually double digital percentages.
Typically this happens in a single day or can be for longer, like a week. When the stock market crash of 1929 happened, the market fell 48% in under two months, which triggered the Great Depression.
However, after many stock market crashes settle, the market usually rebounds and trends upward for a long period of time. If you want to learn more about stock market crashes, I recommended this article from The Balance.
How Common Are Stock Market Corrections?
Now that you know what a stock market correction is, how often do they occur? Well, stock market corrections are incredibly common and do happen fairly often. It’s important to stay the course with your investing.
Pending your age, you certainly can protect your assets as you get older by shifting your investment choices, but it’s common for the markets and assets to end up in correction periods.
According to The Motley Fool,
“Stock market corrections occur, on average, every 1.87 years. Since 1950, the S&P 500 has undergone 37 separate stock market corrections of at least 10%, not including rounding (i.e., declines of 9.5% to 9.9%).”
How long will a stock market correction last?
Again, many experts will try to predict everything about a stock market correction, but getting the info 100% accurate is near impossible. Besides these common corrections at different time periods, each one can also last a different length of time.
Again, based on some great data and information, The Motley Fool has shared this:
“Cumulatively, the S&P 500 has spent 7,040 days declining in correction since 1950. Given that there have been 36 corrections, the average correction time is about 196 calendar days over the past 68 years.”
And another thing to note after these stock market corrections, is typically a bull market rally (meaning markets go up) follows and erases all the losses. Remember, this is not always true and sometimes the correction gets worse. But again, it’s very hard to predict what exactly will happen.
Sounds a bit scary to think about how your money and investments can lose value, right? But as the title of this post indicates, don’t panic! In the next section, I have some tips on what to do and how to stay sane during a correction.
Investing Tips to Prepare and Stay Sane During A Correction
When a stock market correction happens, what do you do if you are invested? Probably the most common advice you hear is don’t panic. But how often do newbie investors follow that advice?
For one, I knew that going when I first started and guess what I did each time for the first year when a correction happened? Panicked!
I did not wipe out my investments by panic selling, but I certainly lost some money and messed up my compound interest rhythm.
So what is one to do? You’ll probably still make some mistakes during your investing, but practice some of these tips below to be prepared and stay sane during a stock market correction.
Breathe and check your emotions
Simply breathe, ignore the markets for the day if you see negative numbers flashing and start to think logically. Easier said than done, but you need to avoid emotional investing.
If you panic sell (or buy) too quickly into the correction hype, you’ll probably make rash investing decisions that you will later regret.
This may take some mental training on your end, but learn to leave any of your emotions at the door and take some deep breaths before pulling any selling or buying triggers.
Avoid reading the major investing media
Many articles in the investing and finance world are negative, because that type of press sales and gets the clicks. But the thing is, these “doom and gloom” articles dominate during stock market corrections. Hell, I’ve seen them while writing this article talking about an impending crash!
It’s okay to be informed and understand what is going on in the markets. But all the negative and click-bait headlines can drive you to make poor investing decisions.
Seriously, I found myself not knowing what to do because I was so enamored with the scary headlines in my early investing days. It’s a media trap!
Do your own due diligence
Similar to being cautious with the media, do not blindly trust anyone’s advice about a stock market correction or what to do. That could be a writer, financial guru, friends, family, etc.
Certainly getting advice can be a good thing, but don’t act on any advice without doing your own research on what you might have heard.
No one truly knows what or why the stock market correction is happening, so their advice may cost you money or future gains. With anything, you should never blindly follow along without understanding the advice.
Have some cash ready to buy
When stock market corrections happen, this can be a golden opportunity to buy. Sure, you won’t be able to predict the exact lowest point a stock, bond, or fund will go, but it can be a great time to buy more shares.
One of the best things you can do as you invest over the years, is leave a portion of money in cash. When stock market corrections happen — or “go on sale” — you are prepared to buy while others are panic selling.
As much as I cheer for bull markets, I enjoy a good stock market correction to re-up on great index funds.
Keep some cash on the sidelines too
Even though it is great to have cash ready to buy during most corrections, you also do not want to go all in. This is especially true if you have not done your research or have a decent understanding of what the markets are doing.
It’s always good to keep cash on the sidelines to not only protect from major losses, but from any bad purchase decisions you may have not thought through. You may potentially miss some minor opportunities, but it can help keep you sane when you really do not know what you are doing.
There were quite a few corrections where I just left the money on the sidelines instead of buying. I wasn’t sure what I wanted to do and felt more comfortable with keeping cash. Now, I always leave a percentage of money in the investment accounts that are not for buying or investing.
Ask yourself what type of investor you are currently
Pending where you are at in life, your investing style may reflect on what you do or don’t do during a stock market correction. For example:
- Long-term investor? Stick to your plan and practice dollar cost averaging
- Short-Term investor? Be more prepared to sell or buy. Essentially you’ll be on your toes to take action.
- Close to retirement? Your investment account should already be conservative and balanced, but make additional protections to ensure your money is best protected as possible
Continue to prepare and expect future corrections
Even when the economy and the stock market is in a great bull run, you should always be prepared and expect more stock market corrections. Based on the data I shared about earlier, it’s inevitable that it will happen again.
You won’t be able to predict the exact day or reasons why, nor will you know how long it will last. Instead, all you can do is know that it will happen, practice the tips above, and be mentally and financially prepared.
Did you panic during your first stock market correction? What do you do to stay sane when it happens now? Let me know in the comments below!