After an extended period of steadily rising markets and low volatility, October was a very bad month for stocks. The S&P 500 fell about 10 percent from the beginning of the month before finishing the month down 7.3 percent. The technology-laden NASDAQ index fell even further before finishing down about 9 percent.
Many investors may get nervous when they see their accounts go down. They may also be wondering, is this a normal market correction or is this the start of a big bear market? While no one knows the answer to this question, it’s important to put this recent correction in historical terms. Although 2017 was the least volatile year in the last 40 years with a max draw-down of only 2.8 percent, a 10 percent correction has occurred in 22 of the last 40 years.
Despite all of those corrections, the S&P 500 averaged 9.9 percent per year over that span.* However, according to prominent studies, most retail investors substantially under-performed the index due to poor market timing decisions. As markets start to fall, many investors become more defensive and reduce exposure to equities. Invariably, they miss all or part of the recovery and then they get back in, only to repeat their past mistakes.
The way to avoid this common investor mistake is to expect these corrections and view them as normal market behavior while remaining invested or, better yet, increasing exposure to stocks following a correction. Of course there is uncertainty about upcoming midterm elections, future fed rate increases and deepening trade wars. However, there is almost always political and economic uncertainty, which can cause investors to become nervous. While markets are falling, it’s very stressful. Once markets recover, however, investors typically won’t even remember that the correction even occurred.
The moral of the story is be a long-term investor and don’t sell into corrections.
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