4 Lessons to Learn from Market Corrections

Written by Lloyd Danon

Between February and March 2020, the stock market dropped dramatically as the S&P 500 index fell over 30 percent due to growing concerns of COVID spreading across the globe. This sudden financial collapse reminded many investors, including the team at Argentum, of the global financial crisis of 2008, where a volatile market left plenty of uncertainty. Once countries started to make headway to ease the spread of Covid-19, the market has seen an upturn into recovery.

We can learn from these events that a Bear Market is no cause for panic but an excellent opportunity for investors. To help ease your stress in times of severe volatility, consider these four important lessons that will see you through market high:

Lesson 1: Corrections are Normal – You Should Expect Them

Corrections are a normal function of how the financial market operates, and although no one can predict when they will occur, it’s best to prepare for them. Every time the market takes a hit, investors are surprised and often panicked by it, even though there have been many bear market corrections throughout human history.

While a bull market can last for an extended period, there will always be a time when the bear market emerges, and when it does, it’s important to remember that it won’t last. In general, the bull market’s upturn will more than make up any losses sustained from a market fall.

Changes in market pricing are how investors make money from the capital markets. We need market corrections the same way a farmer needs to leave a field fallow to grow crops.

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Lesson 2: Keep Your Cool

The number one rule in investing is don’t get emotional. The worst thing you can do is sell in a panic, which is a strategy that pretty much always fails. If you find yourself getting emotionally entangled with your finances and investing, contact a financial adviser to help you work through the decision process. The old saying is don’t buy at the top and sell at the bottom, but unfortunately, this is still what many private investors end up doing because they are concerned about a loss of capital. Having an experienced and trusted financial advisor can be a much needed second opinion during these times to guide and advise you on where the real risks are.

Having your investments set up appropriately before a correction is vital for weathering the storm. Portfolio management adds a level of security, with downside risks and market exposure designed to reduce during times of market uncertainty. Also, a portfolio should be liquid enough that you can switch quickly between asset classes and current holdings if necessary.

Lesson 3: Act on the opportunity when others are in a panic

It may seem counter-intuitive to buy stocks when everyone is in a panic, but market corrections can be a great opportunity to get into the markets when the prices are low. This is an excellent strategy that many people new to investing are also attracted to, which has been a growing trend for those who are more willing to take a gamble. This isn’t always an easy decision to make at the time, but historically it has always worked out for the best.

Keeping your cool when there is a lot of uncertainty and emotion with the market is a chance to capitalize while others are on the sidelines. Resist the urge to sell shares and consider the bigger picture that could net gains from being bold. Although severe market crashes can sometimes take over a year to recover, investors who buy shortly after a financial crisis tend to gain the most compared to those who buy after the market has started to recover.

4 Lessons to Learn from Market Corrections

Lesson 4: Your Investments Should Match Your Appetite for Risk

Some investors make the mistake of having portfolios that are too aggressive for the current financial situation or appetite for risk. Although the potential for higher returns looks very attractive during market bull runs, it’s only during the market corrections that the real price of risk is revealed. In order to avoid the negative effect of a bear market, it’s essential to have the right financial portfolio for your risk profile.

Market corrections also give investors a clear understanding of the value of a diverse portfolio. Bear markets will have specific sectors that are hit harder than others, and a diverse portfolio with help ease the overall hit from a down turning market. Don’t just ask yourself how high of a return you want; also ask how much of a loss are you capable of stomaching.

Not sure where to start? An experienced advisor can help you find the right mix of investments to build a solid portfolio for any market and put you on the right path for what you need to do to achieve your financial goals and dreams.

Contact us here at Argentum Wealth for a free consultation. We’d be happy to help.

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