If you were to ask us to answer that question in short, here’s what we would say: Remain calm, patient, and try not to make decisions based on emotion.
As we've written before on stock market corrections, they can be rather unnerving, but at the same time they are a normal part of rising markets, and they’re usually short-lived. It’d be great if the market always went up in a straight line, but unfortunately it does not and there are often pullbacks along the way.
So, knowing that corrections will likely occur quite a bit over time, what’s the best investment strategy for handling a stock market correction? We go back to the statement we made at the beginning of this post.
Often times when the market starts to decline, you’ll see a lot of news headlines that invoke worry about the state of things. A top headline today on Bloomberg, for instance, read: “US Stocks Retreat Following Worst Week Since 2012.”1 That certainly doesn’t make many people feel warm and fuzzy about the market.
In order to remain calm, investors must keep focus on the longer-term fundamentals of the economy, as well as remembering that their investment plan should factor-in market dips along the way. If you’re not sure your investment plan is positioned for this possibility, please speak to your financial advisor as soon as possible.
A study that tracked the performance of the Dow since 1945 showed that stock market corrections produced an average decline of 13.3% over 71.6 trading days, which is about 14 calendar weeks or a little over 3 months!2 For investors feeling the sting of a falling portfolio, 3 months can feel like an eternity. But again, the nature of a correction is that it is a temporary setback in an otherwise upward trending market, so patience is required to make sure you capture the recovery when the market starts to rise again
Don’t Make Decisions Based on Emotion
Seeing and feeling declines in a portfolio, along with seeing news headlines and stories that question the health of the market, can cause even the most steady-handed investors to second guess their strategy. As investors start to question their strategy and get nervous about the market, emotion can start to set-in and potentially influence decision-making. Investors should resist the temptation to make an emotional decision based on nervousness or an impulse to stop losses. Instead, they should speak with their financial advisor about what they’re thinking, and listen to reasons a strategy shift may or may not make sense.
Call WrapManager to Get Our Thoughts on the Market and Your Portfolio
One of our Wealth Managers would be happy to discuss our market outlook with you, as well as sharing with you the viewpoints of other experienced and professional money managers. Additionally, it is important to make sure your portfolio is properly diversified with respect to your investment objectives, risk tolerance, and time horizon. This can potentially help you weather the effects of a stock market correction as well. Give us a call today at 1-800-541-7774 to talk with us more about it.