A Stock Market Correction Could Be Coming. Here's What 55 Years of Data Says to Do.
Key Points
Although worrisome while they’re happening, such setbacks are actually pretty common.
They’re also typically not devastating.
Professional and amateur investors alike feel that any correction right now won’t be the beginning of a recession-driven, full-blown bear market.
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The market is setting new record highs right now. It's up 18% from its late-March low and 47% above last April's bottom. For some, it's creating a feeling like the market is overdue for a correction (even if only minor). That's especially true given many stocks' steep valuations at this time.
What should investors do here? Well, doing nothing is a perfectly viable option.
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Past corrections by the numbers
OK, most investors will want to do the obvious things like taking profits on their more ... "adventurous" trades that they never actually saw as long-term positions. For any stocks you bought as true "forever" holdings, however, your best course of action is arguably just riding out any potential storm.
Researchers with brokerage firm Edward Jones crunched the numbers. Since 1970, the S&P 500 (SNPINDEX: ^GSPC) has suffered 19 corrections of 10% or more without surpassing the bear market threshold of a 20% setback. The average decline lasted 4.3 months, and from peak to trough, the index fell 14.7%.
In other words, assuming any correction made in the immediate future doesn't evolve into a full-blown, recession-driven bear market (and the market's saying there's less than a 30% chance of that right now), this relatively common market action will be over pretty quickly with a minimal amount of misery.
It's what happens once it's over, however, that will likely inspire you to simply sit tight. Edward Jones goes on to say it only takes an average of less than four months to reclaim what was lost during the correction. And the broker's data points out that the average market gain six months after the correction's bottom is an impressive 18.4%.
For most investors, it's best to keep it simple
As tempting as it may be to attempt to sidestep the setback and jump in near the bottom, that's probably the wrong strategy for most investors. The fact is, the market's peaks and troughs are impossible to pick with any real precision. Trying to do so often does more harm than good.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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