While many may agree investing is worthwhile, investing in the stock market can be a nerve-wracking experience. Watching the market’s ups and downs daily can make even the most experienced investors anxious. One particular event that often causes panic among investors is a market correction.
A stock market correction is when the stock market falls by 10% or more; this can sometimes be known as a bear market. During such times, you may be prone to giving into fear and making impulsive decisions that may harm your portfolio in the long run. However, staying calm during a market correction is crucial for success in investing.
We have tips on staying calm during uncertain market conditions so you can stay assured and make decisions with a clear head.
Focus on Your Long Term Financial Plan
Remember, the stock market is cyclical, and downturns are a normal part of the economic cycle. Keeping a long-term perspective, you can weather the storms of the market and come out ahead. Your investment portfolio is similar to a marathon rather than a sprint, and your goal is not a quick fix to make a few bucks. If the market takes a temporary dip, it’s not the end of the world. By focusing on your long-term goals and sticking to your plan, you can better your financial situation no matter what happens with the markets.
Have concerns? Have a conversation with your financial advisor. They can show you if your investments show any significant change, what individual stocks might have future results you can benefit from and are currently offered at discounted prices, or provide peace of mind.
Trust the Past Performance of the Stock Market
Throughout its history, the stock market has been marked by a fair share of ups and downs, but past performance shows that economic growth occurs over time. While short-term dips and fluctuations may cause panic and induce hasty decisions, a long-term outlook is necessary for success in investing. Those who have been able to trust in the market’s overall trajectory have seen impressive returns over time.
Even the most steep and alarming crashes have eventually been followed by recoveries and new highs. It is important to resist the temptation to react impulsively to every hiccup in the market and instead hold steady with a firm belief in the power of time and patience. Ultimately, those who remain focused on their long-term goals and maintain trust in the market’s trajectory are most likely to withstand short-term declines in stock prices and reap the rewards of their investments.
Does Investing Beat Inflation?
You may be tempted to pull your money out of the market and put it in a nice and safe saving account. However, one of the most significant advantages of investing is it beats inflation in the long run. Inflation, the steady rise in prices of goods and services, means the purchasing power of your money decreases over time. But investing helps counteract this effect, as the rate of return on investments tends to exceed the inflation rate.
This means as time goes on, the value of your investments grows while the value of money decreases, thereby staying ahead of inflation. Ultimately, investing is a reliable way to secure your finances and build long-term wealth, while leaving your money with the bank reduces your purchasing power over time.
Don’t Follow Global Stock Markets Too Closely During a Market Correction
When it comes to investing, it’s easy to get caught up in the rollercoaster ride of short-term fluctuations in the market. The ups and downs can cause panic and uncertainty, leading many to make impulsive decisions that can ultimately hurt their investment portfolio. However, it’s important to remember that investing is a long-term game.
By letting go of the need to constantly monitor the market’s daily movements and focusing on your overarching investment goals, you can make sound, strategic decisions that will ultimately pay off. So, take a deep breath and learn to tune out the noise of short-term fluctuations. Your portfolio (and peace of mind) will thank you in the long run.
Keep an Eye on Fundamentals
Whenever there is negative movement in the market or a particular stock, it’s important to keep an eye on the fundamentals of the companies you have invested in. Companies with solid financials, consistent earnings growth, and a competitive advantage tend to perform well during market corrections.
Many Investors Choose to Diversify Their Portfolio
Diversifying your portfolio with strategic asset allocation across different classes and sectors can help reduce your overall investment risk during market corrections and is key to weathering a market correction. By investing in a mix of stocks, bonds, and cash, you can spread your risk and avoid having all your investment eggs in one basket. Diversification can also help protect your portfolio from market volatility, ensure you’re not overly exposed to any one type of investment, and give you the confidence to stay invested during a market correction.
Stay Informed About Stock Market Corrections
During market corrections, staying informed about market news and economic indicators is essential. While this may seem contradictory to the above, it’s important to avoid overdoing it. If you find yourself checking USA Today, Washington Post, motley fool, or another online platform multiple times a day for the latest news on market conditions, you may want to take a time out.
On the other hand, however, it is also important to not take a completely hands-off approach and to monitor your investments by staying abreast of any market trends that may impact your investments. Additionally, while some news is helpful, be careful not to be swayed by doom and gloom. By keeping an eye on your portfolio and investor sentiment, you can avoid the mistake of selling low and buying high as you try to “time” the bull market, for example.
Don’t Be Afraid to Seek Professional Advice
At any time should you begin feeling overwhelmed when stock market corrections happen or you find yourself unsure about your investment strategy, seek professional advice. Financial advisors have experience in navigating market corrections and can provide valuable insight into the situation. They can also help you understand the risks and opportunities presented by the market correction and help you make decisions backed by years of experienced and based on your specific investment objectives.
The Bottom Line
Whether bear markets or bull markets, market corrections can be stressful. Staying calm during such times is crucial for success in investing. By having a plan, analyzing the situation, focusing on the long-term, avoiding overreacting, and seeking professional advice, investors can stay calm during a market decline and come out on the other side with a stronger portfolio.
Market declines are a part of the natural ebb and flow of stock market performance. You will be better equipped to make informed decisions and reach your long-term financial goals by staying calm.
As a member of Planning Made Simple, you can work with your Planning Made Simple Coach to learn more about how a stock market correction may impact your investment performance or retirement plan. If you’re not a member of Planning Made Simple yet, join today.