Dealing with a Stock Market Correction

The last few days have seen markets fall around the world, prompting some to consider whether this is finally the end of the current long bull run. Sudden sell-offs can cause consternation amongst investors, so what is the best way to deal with a stock market correction?

The technical definition of a stock market correction is when a market index falls by at least 10%. The market is not generally considered a bear market until the market has fallen by 20%.

Any number of events could trigger a market correction, from investors thinking the market is about to peak to sudden spikes in long-term bond yields like the one we experienced last week. Whatever the cause, corrections are often short-lived, typically lasting no more than 7-8 weeks. More importantly, a correction does not mean the bull market is at an end or that a recession is around the corner. Indeed, some market strategists say that the bull market may have further to run, due to continued investor optimism, earnings growth and solid economic momentum worldwide.

It should be remembered that stock market corrections are a natural and healthy part of the market cycle. According to Ned Davis Research, since 1945 the markets have seen 76 pullbacks of 5-10%, 26 pullbacks of 10-20%, eight pullbacks of 20-40% and three pullbacks of more than 40%. This equates to about one correction every year.

A correction is the market’s way of pressing the reset button. Corrections help to temper the irrational exuberance and optimism of investors and remind them that markets may fall as well as rise.

So what should investors do when a market correction occurs? The starting point is not to panic. When corrections happen, for most investors, assuming your portfolio is invested according to your financial plan, it is best to stay on course and ride it out.

However, it does present an opportunity to re-evaluate your portfolio. During this long bull run, it is possible that your portfolio has got out of balance somewhat, as some assets have risen more than others. So re-appraising and rebalancing your portfolio might make sense for some to ensure that your portfolio is still in line with your long-term financial goals.

Finally, many value investors view a market correction as an opportunity. As prices decline, companies that were previously overvalued can be bought for cheaper prices following a correction. As some investors panic and sell, others spot the bargain-buying opportunity.

If you have any questions about market corrections and/or wish to discuss your investment portfolio, contact Kellands today.

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