At market close last week, we entered stock market correction territory with a decline of more than 10% in only 1 month.
For new investors, or even seasoned investors who have lots of capital tied up in the market, this drop can seem dismal. There’s nothing quite like logging on to your brokerage account only to see thousands or tens of thousands of dollars erased from your bottom line.
What is a stock market correction?
A stock market correction refers to a price decline of 10% or more following a temporary upswing of prices.
Stock market corrections are natural market events with common and predictable attributes. On average, the stock market corrects once every 357 days, or about once per year. The average correction is a dip of just over 13% and lasts 14 weeks.
In other words, this has happened before, it’s going to happen again, and it will probably be over soon.
What you should do during a stock market correction
There are two good courses of action to take during a market correction or downturn:
- do nothing
- buy more
The case for doing nothing during a stock market correction
Now is the worst time to sell assets, so don’t let that be a choice. As counterintuitive as it may seem, a tendency towards inaction is generally a trait of a winning investor. Most research shows that people who do less actually accumulate more when it comes to investing. Trading more frequently leads to worse returns, so one of the best things you can do right now is nothing.
Do not check your investment account balances, do not sell off any securities, do nothing.
I also strongly recommend avoiding the financial news for awhile. Financial news websites will publish doom and gloom headlines, but it’s important to remember these have more to do with getting people to click on the headline than actually getting true information to investors. Financial news reporters will tell you to sell everything, sell nothing, or act on some obscure pattern, piece of information, or horoscope in order to get rich or merely save your skin.
All of them will swear this stock market correction is different than last time. Remember, it is never different than last time. Close your browser window and ignore the noise.
The case for buying more during a stock market correction
If sitting still while the market jumps up and down without you is too much for you to handle, you can get in on the game — but only if you’re buying more and you’re doing so wisely.
When you watch your investments dip, one of your first instincts will be to exit before you lose more, but that is actually the opposite of the best thing you can do. Instead, take this opportunity to add to your portfolio. When the entire stock market is down, you have a better shot of finding fairly priced investments. You can add securities to your portfolio without paying a premium for them.
You will often hear people say “stocks are on sale!” during any kind of market downturn. While a great catchphrase, it’s not necessarily true. Some investments are always overpriced, even when they’re down 10%. Others are still a deal at peak market. Most securities simply become better priced during a stock market correction, but that does not necessarily make them good investments.
Do not take this opportunity to buy expensive stocks you wish you owned because they’re shiny or trendy. Do use this time to add to your core portfolio, or invest in securities you’ve had on your wishlist for a long time and were merely waiting for the right entry point. Best of all, if you’re not yet investing, this is your chance to get in.
Brand new to investing? Start right now
If you haven’t got any money in the stock market and you’re wondering what all the fuss is about, this is your opportunity to start investing.
Getting into the stock market is easier than you think, and you don’t need a degree in Finance to get started. You can sign up with a robo-advisor, which will invest automatically on your behalf. I’m a personal fan of Wealthsimple, and if you open an account with at least $100 by clicking here, you’ll get your first $10,000 managed totally free.
If you do want to try your hand at self-directed investing, you want to find a low-cost brokerage account. I personally hold all my registered accounts, including my baby’s college savings, with Questrade. They offer no-commissions on ETF purchases, and buying and selling stocks is typically less than $10 per trade.
Still torn? Now is a great time to forget the market and save cash
I know I’ve personally been looking at this market downturn and feeling broke.
I shouldn’t. Logically I understand there is no connection between my investments and my spending money, but simply watching those balances dip makes me *feel* like I have less cash on hand to go shopping. It also makes me look more critically at my savings. Is my emergency fund large enough? Am I really saving enough for the future?
A lot of personal finance is pure math, but this is a situation where you should trust your gut: how do you feel about the current market downturn?
Your personal sense of security will tell you whether or not you’re putting your money in the right place. If this stock market correction is making you anxious, chances are your money isn’t where it should be. Use this time to reflect and re-evaluate your asset allocation.
While most personal finance resources tend to brush over this, the best place for your money is not wherever it will earn the highest financial return — it’s wherever it will earn you the highest personal return. For some people this looks like a bigger emergency fund. For others, it means putting more cash towards paying off debt rather than investing for the future.
In my personal opinion, a large portion of cash on hand is a great way to quell stock market woes. It might not earn a huge return in interest, but it certainly generates a great ROI in peace of mind. Cash stays the same no matter what the market does, so having a large balance can help you weather stock market corrections, and an inevitable downturn. If you’re feeling uncomfortable right now, increase your cash position.
Remember, nothing lasts forever, not even stock market corrections
While it might feel like there’s no end in sight as your investment balances fall lower and lower, rest assured there eventually will be a bottom.
It’s possible this stock market correction finally ushers in a very long overdue bear market, but it’s also possible stocks recover and that stocks reach all new highs. The only way to find out which is to wait and see what happens next. In the meantime, don’t do anything rash!