From national sports leagues to local schools, almost every area of life has been disrupted by the global spread of the coronavirus. And Wall Street is no exception.
Things hit a fever pitch in early March of 2020 when more and more cases of the coronavirus started popping up in the U.S., sending shoppers scrambling for all the toilet paper and hand sanitizer they could get their hands on. That fear also gripped investors and sent the economy into a dive—and now we are officially in a bear market.
So, how should you handle your investments in times like these? And what the heck do bears have to do with this anyway?
Here’s the first (and most important) piece of advice we have for you: Don’t panic. Some talking heads might say or do things that make you feel emotional about the situation. But it’s all going to be okay. You know how we know? Because market corrections happen on a regular basis. It’s nothing to worry about, but it is something you should be informed about.
What Is a Stock Market Correction?
A stock market correction is a sudden drop in the value of stocks, usually by more than 10% from their most recent high (according to common indexes like the Dow Jones Industrial Average).1
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When the stock market is doing really, really well—like it was in recent years—investors want to get in on the potential profits. That causes stock prices to go up above what they’re really worth. If a bunch of those investors start selling their stocks at the same time, that triggers a correction. And corrections help those overinflated prices return to a more stable level.
Bull Market vs. Bear Market
Bull vs. bear: No, we’re not talking about sports mascots! You’ve probably heard these terms thrown around when people talk about market corrections. Let’s break them down:
A bull market means the stock market is growing aggressively. Stocks are selling for a high price, and investors feel confident prices will keep rising. And until now, we were in the middle of the longest-running stock bull market and economic expansion in American history.
A bear market, on the other hand, describes when stock prices are falling (usually more than 20% of their recent peak value), and investors start to worry they’re going to lose money.
Sometimes a stock market correction can lead to a bear market. And that’s exactly what happened in early March of 2020, when the coronavirus and plummeting oil prices delivered a one-two punch that knocked the wind out of the economy’s sails and sent the stock market into bear market territory.
Now, a bear market generally sorts itself out, but plummeting stock prices can trigger a recession, which is when the economy stops growing for an extended period of time. So you need to be ready for that possibility by staying calm and holding on to your investments. Maybe start piling up money in your emergency fund until the crisis passes. You’re going to make it through this!
How Often Do Market Corrections Happen?
On average, a true market correction (a 10% or more drop in value) occurs every other year.2 Smaller dips in value occur more often than that. Market drops are just a reminder that stocks are not a one-way tram ride up the mountain of wealth building. We will experience bear markets from time to time—it’s just the nature of the game.
Once they begin, market corrections may last days, weeks or months. Over time, though, the market will begin to trend back up and return to profitable levels.
The main takeaway here is that corrections are a normal part of economic cycles. In fact, they’re often a sign that the market is healthy, because when stock values get too high, the market needs to self-correct.
How to Deal With Market Corrections
So, what’s the best way to protect your wealth and ride out the market corrections? Here are four practical tips:
- Stay invested. Investing your money in the stock market is like riding a roller coaster. You have to be prepared for the ups and downs. If you hold on and stay seated, you’ll have a wild ride but end up safely where you want to be. But if you try to jump off early, you’re going to get hurt. Don’t let panic or fear call the shots. Stay invested when the market declines and wait for it to go back up.
- Keep a balanced perspective. If you zoomed in and just saw the market on one bad day, it would look terrible. And if you zoomed in and only saw the recovery, it would look amazing! Neither perspective gives you an accurate picture. When you look at the history of the stock market over the last 80 years, you’ll find that the 30-year return of the S&P 500 has been about 12%.3
- Don’t try to time the market. Building wealth is a marathon, not a sprint. So swing trading or day trading during market corrections is not a good idea. It’s like playing a high-stakes poker game. And it could leave you broke and disappointed.
- Meet with an investment advisor. If you have questions about market corrections, go ahead and schedule a meeting with your investment advisor to discuss any tweaks you might want to make to your portfolio. You don’t have to make any drastic changes, but you can use a market correction as a chance to check in on your overall strategy. And if you don’t regularly meet with an investment professional, then this is a great opportunity to get a pro on your team!
Here’s the reality of the stock market: What goes up will come down . . . and then it’ll eventually go back up! Take a deep breath and know that it’s all going to be okay. If you’re working the Baby Steps to build wealth, all you need to do is stay focused.
And whatever you do, do not pull money out of your 401(k) or IRA. Don’t do it! Now more than ever, you need an investment pro who will help you avoid making a terrible decision you’ll regret for a long, long time. The SmartVestor program can help you find someone who can help you stay focused on your long-term goals.