For the past few months the whole world has been on a Great Pause. Schools closed. Professional sports leagues canceled whole seasons. COVID disrupted just about everything, including Wall Street.
All this hit back in March as more people started coming down with COIVD-19. People became afraid and so everyone ran out and bought as much toilet paper as they could fit in their cars. Many also panicked over seeing the stock market drop. The markets sank like a stone. But three months later the markets have roared back. It’s hard to know what this all means or what to expect moving forward. What’s the best way to handle investing for your future?
Corrections, volatility, bulls and bears—it can become confusing. Stocks go up and they go down. The thing is, they trend up over time. It’s important not to panic and become overly emotional about investing. That can be difficult when we watch what’s going on in the news.
A correction in the stock market occurs when the value of stocks drop more than 10% from their most recent highs. They can last days or months or longer and typically happen once every couple years. Corrections can be healthy when they serve to adjust overvalued stock prices. They can also provide opportunities to buy a stock below its typical value. The most recent correction had more to do with uncertainty around COVID-19.
The outbreak caused a stock market correction that led to a bear market. Chris Hogan, from Ramsey Solutions, explains “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 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.”
Markets cycle back and forth between bulls and bears. According to the Wall Street Journal, on average bear markets last about seven months. And since we don’t know how long this will last, it becomes important to be prepared. That may mean setting aside resources in an emergency fund. But stay calm and hold on to your investments because over the long term, the market will change and you will want to participate in that growth.
So, what’s the best way to protect your wealth and ride out market corrections? Here are a few practical tips:
1. 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 panic or let fear call the shots. Stay invested when the market declines and wait for it to go back up.
2. Keep a balanced perspective.
If you zoomed in and just saw the market on one bad day, it could look terrible. And if you zoomed in and only saw the recovery, it could look amazing. But neither perspective gives an accurate picture. When you look at the history of the stock market over the past 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 both broke and disappointed.
4. Meet with your investment advisor. If you have questions about market corrections, we are always here and available to talk. Or schedule a meeting to discuss any tweaks you might want to make in your portfolio. You don’t have to make drastic changes, but you can use a market correction as a chance to check in on your overall strategy.
Again, stocks go up and stocks go down, but they trend up over time. Remind yourself that in the big picture, it’s going to be ok. Brixton Capital Wealth Advisors recommends Dave Ramsey’s Baby Steps.
Do whatever you can to avoid pulling money out of your 401(k) or IRA. It may be tempting to move investments over to cash. Buy low and sell high — not the other way around.