What is a Market Correction and How Should You Prepare Yourself?

After the collapse in 2008 the stock market has risen to new heights in 2017 and 2018. 2021 has been an especially volatile year and many fear a market correction is around the corner. There is a big difference between a market correction and a bear market. Here’s what you need to know about market corrections and how you can prepare yourself for whatever the future might hold.

What is a Market Correction?
A market correction is a decline of at least 10 percent of a stock, bond, commodity or market index from its highest recent point. Corrections are usually temporary but sometimes people confuse corrections with bear markets. While a correction can be a precursor to a bear market it is not always the case.

Between 1900-2013 there were a total of 123 market corrections, roughly one per year. While the stock market can be volatile in the short term it has a strong track record of long-term success. 27 of the past 36 years have ended with positive returns with an average of 11 percent. History has shown that you are rewarded for patience more often than not.

What Triggers a Market Correction?
There are four main reasons that trigger a market correction:

1. Profit Selling
   Investors sometimes choose to sell off assets and realize their profits. While this event is normal if the volume is high enough it can trigger a reaction.
2. Technical Analysis
   Stock market analysts aim to predict future prices based on patterns. If analysts notice a pattern similar to a previous that led to a correction they might begin to sell. As with profit selling, if too many are sold a market correction could occur.
3. Corporate Earnings
   The stock market tends to follow corporate earnings and directly correlate with their stock price. But, if there is a downturn in the global economic outlook it could also affect earnings prompting a correction.
4. Fear
   Fear is another reason for a correction based on negative news and events.

What Does a Market Correction Mean for My Investments?
Historically, stock market corrections do not mean a bear market is inevitable. Don’t panic or let your emotions take over and convince you to sell. Remember, you need to buy low and sell high for the long-term. The long-term is not weeks or months but years and decades. The only reason you should change your portfolio is if your goals have changed or immediately need money.

How much risk are you comfortable with? Use our free Risk Analysis tool to find your Risk Number!

How Long to Recover From a Market Correction?
There is no specific time as it depends on a number of factors. From 1980-2016 the average market correction took 87 days to hit bottom and another 121 days to return to pre-correction numbers.

How Does This Affect My Long-Term Plans?
The stock market is constantly going up and down. It’s important to always keep a long-term outlook. Our team at Bayntree is constantly monitoring the market on a daily basis, if you have any questions please feel free to call our office with questions anytime.

5 Things to Do During a Market Correction

1. Be Patient
   It’s natural to be concerned with any market decline but doesn’t make any spur-of-the-moment decisions. Remember your strategy and hopefully staying in the market will lead to higher future results.
2. Don’t Overthink It
   Stock market corrections are part of the normal cycle. Avoid over-analyzing by reading every article and watching too much TV.
3. Fight Your Instincts
   Your instincts might tell you that it is better to invest in a rising market than a failing one but history has shown that the opposite is true.
4. Stay Diversified
   If your stock holdings go down in a market correction your bonds should maintain their value. It’s important that you have a diversified portfolio to match your financial goals.
5. Work With Your Financial Advisor
   While it may not be a great time to shift investments, a market correction is a great time to review your financial plan with your advisor. Ensure you have a well-structured investment strategy to give you confidence for your future.

If you have any questions about the market or need assistance reviewing your portfolio, request a call from a Bayntree financial advisor today.

Bayntree Wealth Advisors, located in Phoenix and Scottsdale, Arizona, provides comprehensive financial planning and wealth management. The Bayntree team specializes in all aspects of financial health, including retirement planning, risk management, investment advice, tax strategies, estate planning and insurance.

Bayntree does not provide specific legal or tax advice. Please consult with your tax advisor or legal professional for guidance with your individual situation.