What are the two words that most investors fear? It is a market crash. A stock market crash is a sudden drop in stock prices and it is not defined by any percentage drop. Many stock market investors use market crash and market correction interchangeably. However, there is a difference.
Stock market correction takes place when there is at least a 10% fall in the price after a recent high. Stock market corrections are normal and we can see them happening very often. We can not predict when it will happen, but we can always be prepared for it.
Investors tend to feel a sense of panic when the stock market dips, so here are some points you can remember and keep yourself sane throughout a market correction or even a market crash:
Stock market correction is unpredictable and inevitable
Most investors lose their minds only because of the uncertainty involved in the market. But market corrections are a part of the investing cycle. Historical data has shown that it happens more often than we know. MotleyFool cites a Yardeni Research report, which says that there have been 37 corrections since 1950 on the S&P 500.
A market correction is also totally unpredictable because emotions drive it rather than investment fundamentals. For this, the only thing an investor can do is always be mentally ready for a stock market correction.
Keeping your calm
A stock market correction naturally brings fear and panic along with it. The only antidote is to keep calm and not indulge in panic sell. Investors should try to make a rational call whether to hold or sell and let things run their course. The best thing would be to wait and let the market stabilize a little.
If you look at the previous data of market corrections, you will notice that the market returns are averaged out over the long-term. In fact, markets always fully recover from a correction, even a crash, and investors need to focus on the bigger picture and financial goals.
Stock market corrections are short-lived
Another thing investors should keep in mind is that stock prices bottom out very quickly. There is a probability that a correction may turn into a crash, but the course of a correction is always very short. This can also be because of the emotion-driven force of investors as most of them are on the lookout for a correction and when it occurs, the buyers of the market drive the prices up again, in no time. For example, the COVID-19 crash lasted around 33 days. This is how an investing cycle keeps progressing.
Understanding whether it’s a correction or a crash
Understanding whether the period is only a correction or a crash can also give you a clearer view. According to Forbes, unlike the uncertainty of a correction, a market crash has a big reason for its occurrence.
After this, you can decide for yourself whether you want to bail or hold on to your investments. To help you in the decision process, try re-assessing your portfolio and remember the reasons behind your investments.
Did you invest in these investments from a long-term view to fulfill long term financial goals? And will it make sense to hold on even after a couple of years? These are some questions that you can ask.
Many investors eagerly wait for a market correction. During this time, as the stock prices fall, you can aim to buy great stocks at discounted rates. Keep a list of companies that might interest you when their stock price drops. Typically the price should be less than its intrinsic value when the correction occurs.
This is the right time to select stock. Look for companies that have a strong balance sheet and have been in the market for several years now. Such companies have a stronghold in the market, so they recover quickly.
Adding market winners or blue-chip stocks to your portfolio would make sense right now.
The Long term view of a stock
Investors achieve incredible returns only if focused on the long-term. For this, you need to align your investment goals, the risk you can handle, and your time horizon. Try to plan and include stocks in your portfolio that will pay off over time. Do this even if it means a slow growth rate. This is also a great time to add stability to your portfolio by adding dividend-paying stocks. Dividend-paying stocks are often profitable and beat their non-dividend-paying peers in the longer run. In the end, you need to look past short-term noise in the market.