With a historic correction in February, last week’s market plunge in response to new Chinese trade tariffs, and an administration not backing down, it can be hard to feel secure in today’s stock market. Plenty of pundits and analysts try to predict a major market correction, but for most investors the real question is, “How do I survive one?”
there’s no one-size-fits-all approach, however, there are a few fundamentals
any investor should keep front-of-mind in the event of a significant market downturn.
Long-Term Investors Need Not Panic
For people with a nest egg in the market, a correction is not the ruin of their retirement. Long-term investors with well-allocated portfolios have time to wait and “weather the storm” of a downturn, even as speculators and day traders feel the pain. Retirement accounts should generally recover with the market in due time.
But just how long is ‘due time’? Historically, past S&P 500 corrections (defined as declines greater than 10% but less than 20%) between 1965-2014 have had an average recovery time of 107 days. In other words, after a correction, the markets took an average of 107 days to get back to where they were pre-correction.
Still another study from the American Association of Individual Investors found an average of 4 months for a recovery — an unnerving amount of time for most investors, but perhaps not as long as you might think.
Every correction is different, of course. Past stock market movements don’t predict what’s going to happen this time. But when you look at the way corrections have historically played out, you can start to see why panic is a bit premature.
Turn off the Television
Of course, big market changes will make the news. Often, they’ll be over-reported. The truth is, even well-versed investors can get swept up in market panic. If you’re the kind of person who watches TV and worries, spare yourself the stress and change the channel. There’s nothing easy about a correction, but they are a natural part of the market. Sometimes, the smartest thing you can do is cut out the noise.
A correction can also be a strategic time to bolster a portfolio, in consultation with your financial adviser. ‘Buying the dip’ is a mainstay market attitude and stocks can drop quickly and significantly in a correction, becoming excellent value. For investors with the means to act, a correction can provide a cost-effective entry point for investments off of their highs.
Have a Plan for the Next One
Just as no one can time the market, no one can say exactly when a market correction is going to happen. However, a market correction can offer visibility into which stocks are most volatile and which are proving more stable. This presents an opportunity to work with your financial adviser to gauge overall portfolio risk and stress test the components of a portfolio that may not be performing as the investor anticipated.
If your needs are changing – or you just can’t sleep at night with the portfolio you have – it may be worth revisiting your time horizon and appetite for risk. You and your financial advisor may determine that adding more historically conservative investments, such as bonds or defensive stocks, may not only diversify your portfolio, but may better reflect your investment preferences.
Still, the uncertainty surrounding a correction can leave investors spooked. In a tense market like today’s, having a source of advice you trust can help you make sense of market behavior and plan effectively for the future. Here at Baird, we have years of experience working with oil and gas professionals to help them plan their futures. We’ve seen our fair share of corrections, and we’re ready to help you.
*Past performance is not a guarantee of future results and no investment strategy can assure a profit or protect from the potential loss of principal.