You take the good; you take the bad, you take them both, and there you have the facts of (life) stock market volatility. We’ve had a bunch of good news in the stock market for the past decade-plus, now we are getting some of the bad days. Keep reading for what you need to know about stock market corrections and what you should be doing from now on to stay on track for financial freedom.
Stock Market Correction Definition
A correction is a 10 percent drop in stocks from their most recent high. It is pretty straightforward; it is considered a correction if a stock market drops 10%. Different indices or stock markets can be in a correction at different times. Examples of indices you may have heard about a lot are S&P 500, Dow Jones Industrial Average, Nasdaq, and various international stock markets.
What You Need to Know About Stock Market Corrections
Without stock market volatility and corrections, you wouldn’t be able to earn the outsized investment returns afforded over time by the stock market. Stock market corrections happen on average about once per year. They can happen more often, and some are more dramatic than others. For example, you may have missed the stock market correction at the beginning of the Coronavirus pandemic, as you were probably distracted trying not to die from this new scary and deadly virus. The market quickly dropped more than 30% and bounced back to new highs.
In case you are wondering, the S&P 500 is up around 740% since it bottomed in March of 2009 during the financial crisis. Since then, we have suffered through corrections of 16%, 19%, 10%, 19%, and 33%, and the S&P 500 still marched to record highs into 2022.
What To Do Now with Your Stock Investments
You shouldn’t make significant changes to your overall investment portfolio based on headlines in the news, big drops in the market, or even big gains in your accounts. For most people who are still working and saving, set up automatic contributions to your various investments. Invest into a diversified portfolio of funds or ETFs, and go on enjoying your life. You can even set up the automatic rebalancing of your portfolio, so you won’t have to spend much time actively trading in your account.
How Fast Can a Stock Market Correction Happen?
If we look at the stock market correction since WWII that didn’t result in a bear market (a drop of 20% or more), it took just 76 days, on average, for the S&P 500 to lose 10% from a recent high. The stock market correction of 2022 took just 50 days.
At this point, we don’t know for sure whether this stock market correction will or won’t turn into a bear market.
After the bear market of February 2020, the stock market moved into correction territory in just over a week. When it bounced back out of the bear market territory, it turned into both the shortest market correction as well as the shortest bear market on record.
It’s said that the stock market hates uncertainty. When you combine record-high stock market valuation with a global pandemic, inflation, and rumblings of WWIII in Ukraine, it’s not terribly surprising that we have seen a drop in stock market values. On the flip side, Americans keep spending, the housing market is on fire (in a good way), and unemployment is extremely low, all signs of a strong economy, at least domestically.
What Not to Do Now
Keep contributing to your investment and retirement accounts regularly. Don’t make drastic changes to your investment allocations based on headlines you see during the 24-hour news cycle. If you are tired of worrying about the day-to-day volatility of the stock market, consider working with a fiduciary fee-only certified financial planner who specializes in working with people like you.