Market Correction – A Normal Occurrence
Market correction is a normal occurrence. After returning 28.7% in 2021, S&P 500 Index has been on a roller coaster ride since the beginning of this year due to potential Fed rate hikes, inflation concerns, and geopolitical tensions. The index is down 8.6% year-to-date.
Source: Google Finance
Corrections are not easy to go through even when you know that the portfolio loss is on the “paper”, as long as you do not panic and sell. Market timing is not a good investment strategy. When you try to time the market, you have to be right twice; when to get out and when to get back in. In addition, market timing is not only challenging but it could reduce the rate of return of your portfolio.
Based on the last 50 years of market history, 5% to 10% correction is normal. Here is the average frequency of significant stock market declines according to this article (Source: Money,.com).
- 30% correction, every 9 years
- 20% correction, every 4 years
- 10% correction, every 1.6 years
If you wish you had more bonds in the portfolio during the market correction, you may be taking on more risk. Consider revisiting your investment policy statement and make necessary changes that you can stick with through market ups and downs.
So keep this perspective in mind and “stay the course”. Because Despite all the corrections, the equity market rises in the long-term. Consider revisiting this article Do’s and Don’ts of the Bear Market.