Simple Certainty | Market Corrections: Why There’s Nothing to Fear
It’s the evening, you’ve got a glass of wine at your elbow, and the TV’s on. For some reason, you’re watching the news – and the world is ending. The markets are down 10%, and it’s time to sell, sell, sell. Believe it or not, that’s just about the last thing you should do.
Facts overcome fear
Here at Halcyon, we’re big fans of facts. They cut through the noise, offer guidance and provide certainty. Today, we have two in particular that demonstrate why you shouldn’t fear a market correction.
Fact #1: Since 1900, there have been, on average, a market correction every year in the US stock market.
Think about that: if you’re 50 today, you can expect to live through another 30 or 40 market corrections. Why is this fact important?
Whenever we experience a market correction, pundits begin throwing around words like ‘turmoil’ and ‘volatility’. We can’t blame them. Peddling fear is their job, and it sucks people in. Pretty soon, they have everyone believing that what’s happening to the markets is a once-in-a-generation free-fall and you need to get out quickly.
The above fact, however, reveals the truth. Market corrections occur far more frequently than you think. They are a routine part of investing, and instead of fearing them, we need to accept them as regular occurrences.
Fact #2: The average market correction lasts 54 days. That’s right – barely two months. Blink, and you’ll miss it. Hardly events that take years to recover from.
But the doomsayers are in your ear, preaching that 54 days is plenty of time to lose it all.
Again, fear-mongering meet fact. Over the last 100 years, corrections have only seen markets drop on average 13.5%. Not only that, but fewer than one in five corrections turn into a bear market.
Keep calm and avoid knee-jerk decisions
When we experience a correction, we’re tempted to cash out in case of a crash, but these facts clearly point out that a crash is incredibly rare. The more likely scenario is that you move your assets into cash right before the market rebounds.
But we understand these reactions. The stock market is a complex beast, and nigh-on impenetrable for those who don’t work in finance. When a pundit on the news starts pedalling fear and panic, starts talking about how we’re ‘due for a crash’, it can be very hard to hold fast and not make those knee-jerk decisions.
The next time you feel that rising fear, stop and focus on the facts. History tells us a lot about what the stock market will do in the future, and that is trend upwards. These market corrections are blips on your portfolio’s journey, and they certainly don’t warrant the panic that some people promote.
That’s it for this episode of Simple Certainty. In our next episode on the stock market, we’re going to delve into bear markets, and explore just why there roar is worse than their bite. Hope you can join us then.
Make sure to call us on (03) 9835 3800 to book your personal appointment.
Disclaimer
Please note this is general information only and you should always seek your own personal
advice.