At the time of this article, the S&P500 is down around 9% this year. Understandably, this causes concern for investors as they watch their portfolios decline in 2022. During a market correction, it is important to remember that the US stock market has been here before. In fact, did you know the US stock market averages one 14% decline every year? In this article let’s explore what happens during a market correction and what you should do to grow your wealth long-term.
What Happens During a Market Correction?
During the panic phase of a market correction, shares of top-quality companies decline in lockstep with the rest of the market. Most investors today buy mutual funds and exchange-traded funds, not individual stocks. When fear grips the markets, these investors panic and sell their funds. The fund managers are then forced to sell their holdings, good and bad, to raise cash for redemption requests. These waves of selling create opportunities for wise investors to buy great companies when they are on sale.
What Should You Avoid?
Avoiding overreactions during a correction allows you to take advantage of volatility. Investors who remain calm can find opportunities to buy great stocks at lower prices. The best time to buy quality companies is when they are on sale, and other investors are afraid to buy them. Wise investors understand that market panic events create opportunities. The keys are to remain calm, stay diversified, look at the big picture, and invest in quality companies for the long run.
What Should You Do?
If you are concerned about your investments, the first thing to do is to maintain a well-diversified portfolio. Diversification among different asset classes provides a buffer against market volatility. The second thing to do is to take a step back and look at the big picture. Despite the recent market decline, the major market indexes are still significantly higher than they were a year ago. Keeping the big picture in mind will help you avoid making emotional decisions when the markets are volatile.
Remember, it is not unusual for the US stock market to decline, and wise investors understand that this volatility is part of investing and creates opportunities to grow wealth long-term.
Matthew A Treskovich | CFA, CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC
Chief Investment Officer