What does a stock market correction really look like?
Over the past 31 years, the S&P 500 has undergone three corrections that turned into bear markets, where the S&P 500 lost 20% or more of its value.
What's more interesting than just the sheer number of corrections is how long they tend to last?
Of the three bear markets, which resulted in respective declines of 33.5%, 49.1%, and 56.8%, took 101 days, 929 days, and 517 days to go from peak to trough.
Two things you absolutely should do during a stock market correction
First, don't panic.
In 35 out of 35 instances since 1950, the S&P 500 (America’s version of our ASX 200) has erased any stock market corrections totaling 10% or higher at some point in the future. That's a 100% success rate over nearly three dozen data points.
So buying any major dip is about as close to a guarantee as you're going to get when it comes to investing in the stock market.
It also means that if you already hold shares in profitable companies, chances are that your original investment theses for the stocks you own still holds true, even if they've followed the stock market lower.
That said anytime is a good time to review why you bought the stocks you own and ensure that thesis still holds water, a correction is an even more in-your-face reminder to do so. Only when there's been a material change in the business and/or your investment thesis does it make sense to sell a stock.
Remember, with the exception of the most recent correction, bull markets have erased each and every correction and bear market in the ASX200, DOW and S&P 500 since their inception.
Great businesses tend to increase in value over time, which is a great incentive to buy and hang on over the long run.
Secondly.Buying and holding is truly the most effective strategy.
You might be wondering why you can't just dive in and out of a share markets at the first hints of stock market trouble and then jump right back in after an official correction of 10% has been reached.
The answer is pretty simple: Timing the market with any long-term accuracy isn't possible.
Researchers from Vanguard undertook the following test.
Starting with a $1,000 portfolio of Australian equities in July 1992 and holding through until October 2018 the market timing strategy attempted to prove its worth by avoiding the worst of market falls – by selling into cash when the market was entering correction territory, at 10% of the previous peak – and getting back into the market after the worst of the damage was over – after the market had risen from the bottom by 10%.
The result after 6,783 trading days?
The market timer checking every day to see what the market is doing and whether to buy or sell has $7,127.
The buy and hold investor ends up with $10,744 or 50% more than the investor who tried to time the market.
If you are stuck in a funk or you’re lost in a cloud of complexity feel free to contact me. Most often in life we just need someone to talk things through and to lighten our load a little. The following articles may also be of help
This post was written by Peter Horsfield, as such they are his personal views. Peter helps you to focus on what’s most important, the right strategies at the right time. To learn more about How to become Financially Independent visit Peter Horsfield Smart Advice
General Advice Disclosure
Sources of this information are considered to be reliable but are not guaranteed. Information published in this article has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained in this document is General Advice and does not take into account any person's particular investment objectives, financial situation and particular needs.
Peter Horsfield in an Authorised Representative and Investsure Holdings Pty Ltd ABN 16 050 286 630 as trustee for Horsfield Family Trust ABN 55 609 068 513 is a Corporate Authorised Representative of Infocus Securities Australia Pty Ltd ABN 47 097 797 049 AFSL and Australian Credit Licence No. 236523
Crises create both panic and opportunities, which one did you choose?Thank you for your article Peter. I especially like the example of the Vanguard researchers and did not know about the existence of this experiment, so thank you for mentioning it.
During the Corona crisis, they were again examples of people deciding, due to the panic, to sell their stocks when the prices were low and losing money because of it. It is unfortunate as the market has already started to recover and in some industries, it is already fully recovered.
Moreover, having many people that sell during a market correction is making the correction even worth as this increase the supply of stocks and decrease their demand creating a drop in price. I believe that during crises, people should look for opportunities to invest in strategic sectors as long as the prices are low rather than selling their stocks. It, of course, depends on one’s risk tolerance and upfront capital. But with a long-term investing horizon and upfront capital, crises are actually creating great opportunities!