Unless you’ve been living under a rock, you’ve probably heard that things are pretty crazy on Wall Street. In early March of 2020, the economy took a dive, and we officially entered a bear market. So, how should you handle your investments in times like these? And what the heck do bears have to do with this anyway?
Here’s the first (and most important) piece of advice I have for you: Don’t panic. Some talking heads might say or do things that could make you feel emotional about the situation. But it’s all going to be okay. You know how I know? Because market corrections happen on a regular basis. It’s nothing to worry about, but it is something you should be informed about.
What Is a Stock Market Correction?
A stock market correction is a sudden drop in the value of stocks, usually by more than 10% from their most recent high (according to common indexes like the Dow Jones Industrial Average).1
When the stock market is doing really, really well—like it was in recent years—investors want to get in on the potential profits. That causes stock prices to go up above what they’re really worth. If a bunch of those investors start selling their stocks at the same time, that triggers a correction. And corrections help those overinflated prices return to a more stable level.
It reminds me of something one of my coaches used to say: “Things aren’t as good as they seem, and things aren’t as bad as they seem. Reality is actually somewhere in the middle.”
Bull Market vs. Bear Market
Bull vs. bear: No, we’re not talking about last night’s game! You’ve probably heard these terms thrown around when people talk about market corrections. Let’s break them down:
A bull market means that the stock market is growing aggressively. Stocks are selling for a high price, and investors feel confident that prices will keep rising. For the most part, 2019 was a strong bull market year.
A bear market, on the other hand, describes when stock prices are falling (usually more than 20% of their recent peak value), and investors start to worry that they’re going to lose money. That’s what happened in early March of 2020. A bear market generally sorts itself out, but plummeting stock prices can trigger a recession.
Sometimes a stock market correction can lead to a bear market. It just depends on how low the value dips.
How Often Do Market Corrections Happen?
On average, a true market correction (a 10% or more drop in value) occurs every other year.2 Smaller dips in value occur more often than that. Market drops are just a reminder that stocks are not a one-way tram ride up the mountain of wealth-building. We will experience bear markets from time to time—it’s just the nature of the game.
Once they begin, market corrections may last days, weeks or months. Over time, though, the market will begin to trend back up and return to profitable levels.
The main takeaway here is that corrections are a normal part of economic cycles. In fact, they’re often a sign that the market is healthy, because when stock values get too high, the market needs to self-correct.
How to Deal With Market Corrections
So, what’s the best way to protect your wealth and ride out the market corrections? Here are 4 practical tips:
1. Stay invested.
Investing your money in the stock market is like riding a roller coaster. You have to be prepared for the ups and downs. If you hold on and stay seated, you’ll have a wild ride, but you’ll end up safely where you want to be. But if you try to jump off early, you’re going to get hurt. Don’t let panic or fear call the shots. Stay invested when the market declines and wait for it to go back up.
2. Keep a balanced 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 over the last 80 years, you’ll find that the 30-year return of the S&P 500 has been about 12%.3
3. Don't try to time the market.
Building wealth is a marathon, not a sprint, so swing trading or day trading during market corrections is not a good idea. It’s like playing a high-stakes poker game. And it could leave you broke and disappointed.
4. Meet with an investment advisor.
If you have questions about market corrections, go ahead and schedule a meeting with your investment advisor to discuss any tweaks you might want to make to your portfolio. You don’t have to make any drastic changes, but you can use a market correction as a chance to check in on your overall strategy. And if you don’t regularly meet with an investment professional, then this is a great opportunity to get a pro on your team!
Here’s the reality of the stock market: What goes up will come down . . . and then it’ll eventually go back up! Take a deep breath and know that it’s all going to be okay. If you’re working the Baby Steps to build wealth, all you need to do is stay focused.
If you’ve got any more questions about market corrections, I want to hear from you! You can ask me a question about investing, retirement, or building wealth. And in the meantime, don’t make excuses. Make progress.
The Chris Hogan Show
On The Chris Hogan Show, I take your calls and questions about retirement, investing, and building wealth. Join us for weekly inspiration and practical advice on how to chase down progress!Watch or Listen