What to do When Stock Markets are Tumbling 📉

What is a market correction?
A stock market correction by definition is a decline of 10% in a given market index from a recent high value. A bear market is the same concept, but a decline of more than 20%. Per the chart below, market corrections typically happen on average every 1.6 years and it’s a perfectly normal, healthy part of a market cycle.

The price of a given stock (and by extension a large collection of stocks like the S&P 500 or Dow Jones Industrial Average) is based on a variety of different factors. The underlying assets & liabilities of a business and how profitable the company is provide insight, but a major influence on a stock’s price is actually how it’s expected to perform in the future. Since we can’t jump in a DeLorean and visit the future, the price of a stock today is partly based on how things that are happening today will impact that stock in the future. As a result, there are thousands of reasons why a company might do better or worse from things happening today, based on how those events impact the company over the long term! Regulatory changes, economic numbers, interest rate fluctuations, improved or reduced earnings, new products, trade agreements, consumer sentiments, and even global pandemics. These are just a few of the things that could happen in the present to impact the future earnings of a company.

Since stocks trade partly on expectations of future earnings, it’s possible that events or circumstances may change as time goes on which alter previously held expectations for how a stock or market index would perform. If a new, unforeseen strain of Covid comes along that is likely to reduce the revenue that businesses are able to earn in the future, stock prices may decline as a reflection of those expectations of lower future earnings. If the event is big enough (like in February 2020 above when Covid first came on the scene), markets may sometimes decline as much as 10% or 20% in a short period of time. Sometimes even more.

• If you look at stock market data from 1926-2015, on average if you invested money in the market over a 12 month period, you had a 74% chance that you’d have a positive return.*

• From 1920 to 2020, the worst total overall stock market return over a given 20 year period was 54%, but if that timeframe was extended to 30 years the total return was 854%.*

• If all else fails, focus on the fact that you’re planning for the long term and find things to distract you from short-term market volatility! 🧘🏻‍♂️📘🍷

*https://awealthofcommonsense.com/2015/11/playing-the-probabilities/

Curious to learn more about investing during a market correction? Click the link below!