What a month! 😱
It’s hard to believe that the S&P 500® index closed at an all-time high on September 20, 2018. Now, just a little over a month later on October 26th, the index closed down 9.3%.
We’re once again reminded of what it feels like to lose money 📉. We know this is what we signed up for, but it doesn’t make dealing with it any easier when it happens.
First thing’s first – don’t panic. Before you start the frenzied pattern of checking your portfolio, calling your financial advisor, and making snap decisions based on the recent market downturn, let’s break down what a market correction is, and what you should do moving forward.
What is a Correction?
As we teeter close to our second “correction” of 2018, it’s important to know what exactly that is. Because I don’t know about you, that’s a fairly neutral term for what feels like a nerve-wracking drop to many investors.
While there’s no universally accepted definition of a correction, most people consider a correction to have occurred when a major stock index declines by more than 10% (but less than 20%) from its most recent peak. It’s called a correction because the drop often “corrects” an overshoot and returns prices to their longer-term trend.
What Happens Next?
First, let’s focus on the positive. If we’re being honest, the returns over the last few years in the United States have been abnormally large. Generally speaking, things have been really good lately! However, many nervous investors are still asking: how many more corrections will take place? And how much further will this most recent downturn go?
The answer is that I don’t know 🤷🏽♂️, and NEITHER DOES ANYONE ELSE.
What we can do is look back historically to see how many corrections turned into bear markets (that is, periods when the stock market falls by 20% or more) to get a better sense of the potential range of outcomes:
There have been 22 market corrections since November 1974, and only four of them became bear markets (1980, 1987, 2000, and 2007). We’ve actually experienced six corrections since the start of the current bull market in 2009 through February 2018 that didn’t turn into bear markets.
Of course, I must reiterate that I can’t predict with any degree of certainty whether this correction will reverse or turn into a bear market.
What To Do Now?
While historical data can help put things into perspective, it rarely is enough to help people sleep at night or change their behavior. The past is easy because we know what happened, but the future is messy since the uncertainty of the potential outcomes cannot be reduced.
And every time stocks begin to fall there’s a little voice in the back of our heads that tell us, “Maybe this is the big one…”
1.) Don’t Panic.
Yeah, I’ve already said this once in this blog post – it’s because it’s true! Even though I sound like a broken record, this is the best advice that any financial advisor can give investors during a market correction.
The truth is that this isn’t a time to lose your nerve or lose sleep or start pulling your hair out. I realize you may be nervous, but this is normal. It really is!
2.) Stop Watching The Financial Media!
So many people turn to the news during market corrections, and it’s a huge mistake. Nobody can forecast the stock market. In fact, it’s (not predictable at all!). Any financial “expert” in the media who claims they can beat the market, or that they can accurately predict what’s going to happen next, is up to no good – and you should avoid them. Getting sucked into these financial prediction shows is going to increase your panic and offer you no real benefit in the long run.
Unfortunately, this is getting harder and harder for the modern investor because technology allows us to have 24-hour access to your accounts online. However, I urge you to actively work against the urge to check your investments more often during a market downturn. Delete the app from your phone. “Un-bookmark” the website from your internet browser. Basically, put barriers in place that make it harder to check your investments, and you’ll be so much happier.
Wondering how often to check your investments? Typically, I recommend annually. However, if you just can’t handle going that long between logging into your investment account, shoot for quarterly check-ins.
You Can Do This
Investing is hard. Times like these is when your emotions and endurance will be tested, but I want you to remember: you can do this! Investing is an emotional journey, but by staying the course and taking a breath to evaluate your investments logically, you’ll be able to make decisions with your end goal in mind.
Still struggling? They can help to act as your sounding board, monitor your investments for you, and keep you level headed instead of making an emotional decision that will end up being a mistake in the long run. If you’re already a client and are worried about making it through this most recent market correction, reach out. I’m here to help talk you through it! If you’re not a client yet and want some support, head over to my page to learn more about how I can help.
Now, if you pay attention to the stock market on a regular basis, this may feel a lot like the previous 10% “correction” we just experienced earlier this year in late January/early February.
That market drop inspired me writing this article: I highly recommend you head over there for some added comfort and some advice on what to do (or, more accurately, what not to do) during a market drop.
Disclosures: Past performance is no guarantee of future results. Investing involves risk. Indices mentioned are unmanaged and cannot be invested into directly. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal.
About the Author:
Desmond Henry is a fee-only CERTIFIED FINANCIAL PLANNER™ professional and founder of Afflora Financial Life Planning in Topeka, Kansas. He helps the retiring/retired plan their finances and invest their money. CLICK HERE to learn more.