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One of the main reasons some people prefer to stay away from stocks and invest in other assets like government bonds and time deposit accounts is that the stock market is far from stable. The investment can almost be explained as a roller coaster.
Formally, a market correction is described as a decrease of at least 10% from previous highs. While it can be scary and make you sweat a bit, it’s usually not a bad thing. In fact, most investors would even say that it was a natural event. With that, let me tell you 8 things you should know about a market correction.
1. Different types of decline
With the amount of news and gossip surrounding the stock market, the definition of such terms in most cases is diluted. They know that there are only two ways for the market to go up or down. But did you know that there are different types of sales clearance?
Withdrawal
Correction
Bear market
The good news is that in the past, a market correction or even a bear market has proven to be much shorter than a bull market. While a bear market may take a few years to recover, the subsequent bull market will take much longer.
2. Corrections are inevitable and healthy
We all know that the stock market cannot always reach the upper right corner of our screens. If so, there are even more concerns elsewhere in our financial systems, such as inflation. Ergo, sometimes when the market goes up and demand dries up, the inevitable oversupply will increase your portfolio numbers.
But don’t worry, corrections are essential to keep the markets healthy.
This slight decrease allows you and other investors to buy at a better price. And when there are investors trying to buy the shares, the demand picks up again, causing the price to go up even more.
3. Corrections are short-lived
Of the 36 corrections in the S&P 500, only 7 took more than a year.
One of the reasons for this is that corrections can be made quickly.
If you’ve ever made the decision to get fit or go on a diet, you know that one day is enough to erase weeks, if not months, of your hard work. The exchange works the same way.
4. Volatility increases
Following the previous point, the volatility index, or VIX, is known to hit large highs during a correction.
It depends on whether investors will go through different emotions. Especially for retirees who don’t have to wait long for their investment to pay off. Those who can resist remaining invested, and many more who cannot bear liquidation. Creates abnormal volume in the markets.
5. It is impossible to predict
While this is a natural occurrence and a common scenario, not a single person in the world can predict when the market correction will occur. It is inevitable, but certainly unpredictable.
Also, there is also no way to know the cause of the stock market crash before it happens. Only after this has happened. Past events can help predict, but they cannot be 100% certain.
Will politics be the cause of the next stock market crash? Or will it be a natural disaster, investor panic, or Federal Reserve policy? We will never know.
6. It is an opportunity for long-term investors
Investors with time in their lives should always view corrections, even bear markets, as an opportunity to buy stocks at a “discount.” I say this because when the stock market falls overall, individual stocks tend to follow this trend.
However, this decrease does not harm the company in any way. The fundamentals of the company and its operation are not affected by the share price. So when looking for stocks to buy or diversify, look for broken charts, not broken companies.
7. Consider Dividend-Paying Stocks
Historically, growth stocks are what propelled the entire stock market to new heights. However, this is a different group of stocks than dividend stocks, also known as income stocks.
Dividend stocks can give you more stability and are more reliable (though not guaranteed) when it comes to paying dividends. The main reason for this is that they are usually established companies that have proven profitable over the years.
It can also help you diversify your investments. If you can get the same return with less risk, why not?
8. You don’t care in the long run
Lastly, don’t panic about a market correction. Once you’ve done your research and the company has a proven track record, there’s next to nothing to worry about. Also, when you zoom out across the stock chart, it almost always increases.
You have to think long-term if you want to reap that sweet compound interest. The shorter the time period you consider, the more noise and volatility there will be. However, with the constant supply of money entering the stock markets, this will only increase demand in a very short time.
