The start of 2018 has been an eventful time in the world of the stockmarket. And that’s completely normal, unlike the previous two years where all the volatility was upwards only. Not that anyone complained about it or even talked about it as volatility.
After hitting highs at the end of January, both the Dow Jones and Standard & Poor’s 500 saw a considerable drop at the start of February, a fall from which the markets have now mostly recovered.
That’s to be expected too. To date all stockmarket setbacks have proven to be temporary. Sooner or later the long-term uptrend reasserts itself. It’s simply a matter of waiting.
During the financial crisis 10 years ago you had to wait two years. That’s nothing compared to the 50 or 60 years you could have money invested.
But what is a “correction” as opposed to a “crash” or a “bear market”?
Put simply, it a correct is when the price of any security or market index declines by at least 10% after a recent high. You can expect and should be prepared for one each and every year.
Three out of four years you should expect the correction to reverse itself and for you to make money. In the fourth year you can expect to lose money but for that loss to be more than compensated by the other three years.
This all presupposes that you have a solid, diversified investment strategy that you stick to come what may. If you don’t or if you panic or chase the latest trend you’re likely to come a cropper sooner or later.
If that’s not the case then you’re either delusional or, in fact, the world’s best money manager and you should immediately set up your own investment firm!
Back to the point….
There are a number of reasons why a correction might happen, but it’s regularly due to short-term gains being experienced despite very little changing in the market. The value increases are often down to the expectation of perceived gains within the mass psychology of investors.
As the number of investors buying into the trend goes up, the price goes up too. Buying slows once the price reaches a certain height, and some of the investors lock their gains by selling. This in turn causes the price to go down again after the brief increase, which creates the market correction.
A market correction isn’t the same as a crash, which is a drop of 10% or more without the preceding high. Neither is it the same as the more sustained market downturn of a bear market, which sees a decrease of at least 20%.
Whilst corrections are often reported with similar negativity to crashes and recessions, they usually don’t warrant such pessimism.
In fact, none of them warrant any pessimism at all. Their biggest threat is what they might do to your mental well being and how that might translate to your behaviour.
If you run screaming for the door you will be selling for a loss it will take forever to recover from. If you sit on your hands and ride it out you will be handsomely rewarded.
IT IS THAT SIMPLE.
There have been corrections, crashes and bear markets in the past, and there will be more in the future.
Each and every one of them has ended up being a fantastic opportunity to buy investments at a great discount before the uptrend reasserts itself.