Unless you’re living in a bubble, you know the stock market has taken a nose dive in the last few days. But take a deep breath. Don’t panic. Things are likely better than your investing portfolio is showing.
What Is a Market Correction?
Many experts in the financial world are saying the recent drop is a “correction.” When the stock market is doing really, really well—like it has been in recent months—investors want to get in on the potential profits. That causes stock prices to go up above what they’re really worth. A correction occurs when those prices return to a sensible level.
And guess what? Corrections are normal. On average, the markets have made at least one correction a year since World War II.(1) Market drops are just a reminder that stocks are not a one-way tram ride up the mountain of wealth-building. The market will go down. It’s just the nature of the game.
Remember, Investing Is Like Riding a Roller Coaster
Investing your money in the stock market is like riding a roller coaster. You have to be prepared for the inclines and the drops. You have to be ready for those turns you aren’t expecting. And you have to understand what you’re getting into before you’re locked into your seat. Once that ride gets going, you can’t get off. You can’t hit a stop button, and you don’t want to try to step off mid-ride.
If you hold on and stay seated, you’ll have a wild ride, but you’ll end up safely where you want to be. If you see the ride through to the end, you’ll come out just fine. But if you try to jump off early, well, you’re going to get hurt.
The same is true of the market. When you start investing, you have to be emotionally prepared for it to go up and down—sometimes dramatically. If you’re not prepared for that, you’ll make one of the biggest mistakes when it comes to investing: jumping out at the wrong time.
When the Market Drops, Look at the Big Picture
If you try to keep your eyes glued on each incline, drop, twist, and turn in the market, you’ll live in panic mode. You’ll never be able to relax and leave your investments alone. Long-term investing works best if you leave your money alone for a long time. Trying to “time the market” is a fool’s game. You have to keep a big-picture perspective.
If you zoomed in and just saw the market on one bad day, it would look terrible. And if you zoomed in and only saw the recovery, it would look amazing! Neither perspective gives you an accurate picture. When you look at the history of the stock market since the merger of S&P in 1940, you’ll find that 100% of the 15-year periods have made money.(2)
The point? If you leave your money alone for a long period of time and invest with the long term in mind, you’ll come out ahead. So, be patient.
If you’re prone to worry or panic, you may want to meet with your investment advisor to discuss any tweaks you might want to make in your portfolio. But don’t panic and put all your money under your mattress. Reacting out of fear leads to mistakes you’ll regret later. Instead, tighten your seat belt, hang on, and wait for the ride to be over. You’ll reach retirement with the money you need for the life you want.
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