Over the past few weeks, consumers of worldwide media have been bombarded with alarming news from the financial markets in Greece, China and Puerto Rico. If those stories weren’t enough to promote a feeling of uneasiness, the New York Stock Exchange shut down last week for a few hours for what was deemed to be a “technical glitch.”
We are left to wonder if these events are just noise, soon to be resolved and forgotten, or if they will culminate in the often-predicted but not yet realized double digit correction that would mark the end of the current bull market.
At some point in the near or distant future, traders and investors will decline to buy the next dip, and the market will correct by 10%, 15% or more. When this adjustment will occur and what will trigger it are impossible to predict. It is a key point to remember, however, that many investors could either benefit from or be relatively unaffected by a stock market sell-off.
- Anyone with an investment time horizon that extends beyond a few months will be relatively unaffected by a market event. These investors have no immediate need to sell.
- Anyone who plans to be a net saver in the coming years will be relatively unaffected by and may benefit from an event. These investors will have the opportunity to take advantage of low prices and add to their portfolios.
- Those who thought in 2012 to wait for a 10% correction before putting more money into the market will be unaffected, but for a different reason. These unwise investors already missed the current rally, so they have no gains to lose.
- Finally, anyone who is fortunate enough to be holding cash or bonds in their portfolio, AND (this is important) has the requisite courage to buy stocks when no one else is willing and the trajectory for market averages seems to be nowhere but down, will see great opportunity at the time of a market adjustment.
Because investors have witnessed two substantial market crashes since the year 2000, many now automatically assume that any market decline will be an agonizing, gut-wrenching experience leading to large and real losses. Rarely do you hear people extol the virtues of a healthy stock market correction. Instead, we are led to associate down markets with calamity and heartache as opposed to an opportunity to buy, or just a passing storm.
Stock market corrections are the environment where successful long term investors make money and unsuccessful investors make permanent mistakes. The current challenges in Greece, China, and Puerto Rico are worrisome, but as they pass new ones will emerge.
Everyone invested in stocks will see a decrease in value on their portfolio statements during a market correction. For most, this is a temporary setback and will reverse as the market recovers. For the unlucky few who fall victim to the headlines, losses could become permanent, but only if they sell.
The markets have always climbed a wall of worry, but remember this: Innovation, technology, and the natural growth of a diversified global economy (and a well-diversified portfolio of investments) continually prove, over time, their ability to outmaneuver market corrections.