Guide to Market Corrections – Part 2

Last week, I identified the correct terms for when the market pulls back and listed many facts pertaining to market corrections. Today, I will complete my list and offer advice on what to do when the next correction happens.

  • The most recent correction took place in 2011, between the end of April into the end of September. The Dow dropped roughly 16 percent. The S&P 500 actually dropped a hair over 20 percent before snapping back. This led some to believe that this was a bear market — the implication being that the current bull market is just 2 years old and not five years old (dating from March of 2009).
  • Bull market rallies in between corrections: There have been 58 in the post-war period. They tend to run for an average of 221 trading days before being interrupted. They gain an average of 32 percent. By this standard, we are way overdue for a correction (but in fairness, we have been for a while).
  • What we should do during corrections? If you are a follower of my column and work, you have invested in high paying ETFs and Closed End Funds and had your dividends reinvested with a goal of share building. You took the time to learn the importance of share building over price appreciation and are now smiling while growing your shares exponentially. Since you have embraced this strategy, you realize that when the market dips, the high paying dividends will buy more shares exponentially since the price of the security is lower. If you have not embraced this strategy then you may want to take some time and learn how it works.
  • For those with time horizons longer than five years plus, then sit back and watch your high dividend paying shares grow. If a correction of between 10 and 20 percent is unbearable to you mentally or financially, that means you’ve either invested more than you should have. And/or not taken the time to educate yourself re how investing works. Make the adjustment you can live with and remember this feeling the next time you find yourself chasing the market.
  • Can a correction become a bear market (or worse even, a crash)? The answer is that this is always possible. However, most corrections do not become crashes, and every single one of them turned out to have been great buying opportunities for select securities in time.
  • No matter what happens, learn to make financial decisions using rational motives instead of emotions. Using emotions usually get you sold out near a market bottom and buying near market tops.
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