Two of the hot-button topics you hear every time you turn on CNBC these days or read your favorite stock market blog are “market corrections” and “are we in the middle of one?” Corrections never feel good, and the media only adds to consumer fear that another collapse is right around the corner. It is one of those catchphrases that certainly gives you pause and may cause you to log into your investment account a little more often than usual. While seeing your account value decrease is never a great feeling, what many don’t realize is that market corrections can be beneficial for your account in the long run. Let’s dive a little deeper into what market corrections are and why they can have a long-term positive impact on your portfolio.
First, let’s talk about what a market correction is. A market correction occurs anytime there is a 10% or greater pullback in an asset class or broad-based market (think S&P 500, the Dow or the Nasdaq). It is different than a crash, which is a sudden, steep drop in prices. The market has corrected 18 times in the last decade, even though we’ve been in a sustained bull market for much of that time. Market corrections can last anywhere between a few days and up to a year or even longer. The average market correction in the US market is between two and four months. While they may cause an investor short-term pain, they do have benefits that we’ll discuss today.
Market corrections can be painful to see regarding your account, and there is no getting around that. You’ve worked hard for your money, and you want to see it grow towards your future goals, whatever they may be. Market corrections do, however, help prevent stock market bubbles where prices rise and then, if they burst, you see a sudden and drastic decline in value across the market. While most investors can cushion smaller 10-20% pullbacks, periods like 2000-2002 or 2008-2009 saw many investors lose half (or more) of their account value (and actual wealth, if they chose to sell during those times.) While corrections can cause stress, they also provide buying opportunities within your portfolio. After long, sustained run-ups, certain assets classes or stocks can become overvalued. These corrections can provide excellent entry points into certain securities at a discounted rate, particularly in otherwise healthy companies with excellent balance sheets. Market corrections can also bring the overall value of companies back down to earth. P/E ratios (price to earnings) can normalize, and instead of companies and the market being considered “expensive”, they can fall back into historical average levels.
Market downturns may also allow an investor to take advantage of dollar-cost averaging. If you invest the same amount of money at pre-planned dates, sometimes you will purchase at lows and sometimes at highs. Over time, the result may be a lower average cost. If you were only to invest at the high points, you might end up spending significantly more than if your entry points were sprinkled between the highs and lows of the market.
With the right investment selection, it is likely your stocks will recover from a correction. By maintaining your investment strategy for the long term, you can capitalize on a market correction and have the opportunity to come out on the other side with an even stronger portfolio.
Eric Moss
Director
emoss@greystonefg.com
Disclosure: Greystone Financial Group, LLC is a federally registered investment adviser. The information, statements and opinions expressed in this material are provided for general information only, are based on data we believe to be accurate at the time of writing, and are subject to change without notice. This material does not take into account your particular investment objectives, financial situation or needs, is not intended as a recommendation to purchase or sell any security, and is not intended as individual or specific advice. Investing involves risk and possible loss of principal capital. Diversification does not ensure a profit or protect against a loss. Past performance is not indicative of future returns. Advisory services are only offered to clients or prospective clients where Greystone Financial Group, LLC and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Greystone Financial Group, LLC unless a client service agreement is in place.
