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What does a stock market correction really look like?

Updated: Jun 4

Kuma, Japanese Bear warning sign
If you go down to the woods today (Teddy bears Picnic). Maybe you're on their menu 😧

What does a stock market correction really look like?

Over the past 31 years, the S&P 500 has undergone three corrections that turned into bear markets, where the S&P 500 lost 20% or more of its value.

What's more interesting than just the sheer number of corrections is how long they tend to last?

Of the three bear markets, which resulted in respective declines of 33.5%, 49.1%, and 56.8%, took 101 days, 929 days, and 517 days to go from peak to trough. 

Two things you absolutely should do during a stock market correction

First, don't panic. 

That's a 100% success rate over nearly three dozen data points.

So buying any major dip is about as close to a guarantee as you're going to get when it comes to investing in the stock market.

It also means that if you already hold shares in profitable companies, chances are that your original investment theses for the stocks you own still holds true, even if they've followed the stock market lower.

That said anytime is a good time to review why you bought the stocks you own and ensure that thesis still holds water, a correction is an even more in-your-face reminder to do so. Only when there's been a material change in the business and/or your investment thesis does it make sense to sell a stock.

Remember, with the exception of the most recent correction, bull markets have erased each and every correction and bear market in the ASX200, DOW and S&P 500 since their inception.

Great businesses tend to increase in value over time, which is a great incentive to buy and hang on over the long run.

Secondly. Buying and holding is truly the most effective strategy.

You might be wondering why you can't just dive in and out of a share markets at the first hints of stock market trouble and then jump right back in after an official correction of 10% has been reached.

The answer is pretty simple: Timing the market with any long-term accuracy isn't possible.

Starting with a $1,000 portfolio of Australian equities in July 1992 and holding through until October 2018 the market timing strategy attempted to prove its worth by avoiding the worst of market falls – by selling into cash when the market was entering correction territory, at 10% of the previous peak – and getting back into the market after the worst of the damage was over – after the market had risen from the bottom by 10%.

The result after 6,783 trading days?

The market timer checking every day to see what the market is doing and whether to buy or sell has $7,127.

The buy and hold investor ends up with $10,744 or 50% more than the investor who tried to time the market.

If you are stuck in a funk or you’re lost in a cloud of complexity feel free to contact me. Most often in life we just need someone to talk things through and to lighten our load a little.

This post was written by Me, as such they are my personal views and not financial or general advice.

You should always seek independent financial advice when it comes to choices about your personal finances. This is one area of your life where it’s worth paying for it to be done right.

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