When a stock index falls more than 10% from a recent high, it is often said to have entered "correction" territory. What does a correction mean? What could happen afterward, and what can you do to help your portfolio weather the downturn?
At the outset of the Covid-19 pandemic, we endured one of the deepest and quickest corrections in history. U.S. stocks, as measured by the benchmark S&P 500 index, moved in and out of “bear market” territory repeatedly in 2022, most recently reaching its low point in September 2022.
Stock market downturns occur periodically, and for various reasons. Sometimes the changes are related to excessive market valuations after an extended bull market. In other cases, they may be due to external events which overwhelm other fundamental factors that traditionally drive stock market performance.
What is a Market Correction?
The economy is struggling with challenges ranging from high inflation to sluggish demand. Sooner or later, it is expected that the financial markets and the economy will move in a parallel direction again.
The general definition of a market correction is a market decline that is more than 10%, but less than 20%. A bear market is usually defined as a decline of 20% or greater. The market is represented by the S&P 500 index.
A correction is a sustained decline in the value of a market index or the price of an individual asset.
How to Prepare for a Correction
Panicking about a bear market can be counterproductive, but being prepared for one is always a good idea.
Consider investing strategies that potentially could help your portfolio—and your emotional wellbeing—in case of further significant downturns. Here are six additional steps all investors should consider:
Fallen Shares = Build Wealth?
Bull markets are accompanied by periods of economic growth and optimism among investors.
Nobody knows when a stock (or the stock market) has hit bottom. As a long-term investor your job (or at least the best path to accumulating wealth) isn't figuring out where the bottom is. Instead, it's sorting out the companies that have a bright long-term future.
The key to success is matching the right investment tools to each market and using them to their full advantage. Short selling, put options, and short or inverse ETFs are a few bear market investments that allow investors to profit from market weakness.
But before making any change to your investment strategy, always confide in your trusted Fiduciary advisor.
Last Thoughts
We simply don’t know for sure when the next stock market correction will be. In our experience, that is exactly why you should start preparing now.
Remember!! Market corrections are a normal part of investing, and by being prepared, you can minimize the impact on your portfolio and increase your chances of achieving your long-term investment goals.
Lastly, experience in trading and investing matters. At NJM Wealth Preservation Strategies, we can walk you through a complete portfolio review and help prepare you and your portfolio for times when the market gets tough.
Set up your complimentary strategy session with your Fiduciary advisor Nicolas J. McLeod and his talented team here today.