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?”
Ultimately,
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.
Consider Opportunities
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.
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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.