After rising 114% from the bottom of the pandemic panic on March 23, 2020 the S&P 500 index topped out on January 3, 2022. Some indexes topped out even earlier. Regardless of when each index topped out the market is now in the process of correcting itself. The correction process is a psychologically painful experience for investors, something that historically happens every 2-4 years. Even though market corrections are a regular feature of the profit-making process they bring angst and fear to most investors.
Over 40+ years as an investment advisor I’ve witnessed at least a dozen correction cycles. I want to share some key thoughts to help you through our current correction:
- This downturn will end—all previous downturns have ended and this one will also. Downturns are always temporary.
- It’s natural and okay to be fearful about losing more of your account’s value but it is not okay to act on that fear—as long as you continue to hold your shares your losses are only on paper and temporary. If you scare yourself out of hanging on to your shares your losses will become real and permanent.
- Corrections occur because companies have become so overpriced that buying demand begins to dry up and sellers have to lower prices to find new buyers. Corrections end when prices have dropped low enough that buyers with cash find the lower prices attractive enough to begin buying again.
- Serious Money investors recognize that corrections are the price one pays to enjoy long-term rates of return of 6%-8%-10% or higher. The real risk of stock market investing isn’t the possibility that you will lose all of your money but rather that you won’t be able to stomach the downward volatility that corrections bring.
- This time isn’t different—although today’s current events are new and different from the current events of past correction cycles it would be a mistake to presume that because they are different you, as an investor, should do something different than simply just hang on. The current problems precipitating this correction will correct themselves, just as past problems have corrected themselves.
- By the time we even recognize that we are in a correction cycle most of the selling pressure has already occurred and we are closer to the end of the correction than the beginning. I can’t promise this is the case right now, but it wouldn’t surprise me if we already closer to the end of this cycle than not.
- Perhaps the best part of a correction cycle is that when this correction ends we will begin a new uptrend. Historically, the uptrend following a correction rises first to the previous high point of the market and then continues well past that high point, making a series of new highs.
- Often the first few days/weeks of a new upswing show the biggest percentage gains of the entire rally. So it is important to know that to take advantage of the next upswing you have to be owning your shares when the upswing begins. And the only way to be sure of owning your shares at the beginning is to be owning them on the way down.
- This Too Shall Pass—often quoted as the four most important words for investors, know that they may also be the truest words for investors. JR