How Much Should You Worry About a Stock Market Correction? Numbers and Tips for Weathering a Financial Storm
The easy answer is yes. After all, investing in the stock market is inherently risky and today’s world feels more unpredictable than ever before. The very worst case could be quite economically devastating — whether you own stocks or not.
Money Magazine is reporting that:
“Two-thirds of business economists in the U.S. expect a recession to begin by the end of 2020…
…About 10 percent see the next contraction starting in 2019, 56 percent say 2020 and 33 percent said 2021 or later, according to the Aug. 28-Sept. 17 poll of 51 forecasters issued by the National Association for Business Economics.”
However, done right, investing in stock markets is perhaps not as risky as your gut tells you. And, a stock market correction is not necessarily all doom and gloom.
Below are some facts about corrections and our current economic situation.
Skip to the bottom to get tips for planning for and weathering a correction.
What is a Correction?
Generally, a correction is defined as a 10% or greater decline in the price of a stock or a collection of stocks from its most recent peak.
Corrections to Markets Are Relatively Common
According to Investopedia, between 1980 and 2018, the U.S. markets experienced 36 corrections.
- Ten of these corrections resulted in bear markets, indicating an economic downturn.
- The other 26 remained or transitioned back into bull markets reflecting economic growth and stability.
Individual stocks are riskier and correct at a much greater pace and for a much wider variety of factors than markets, indexes or funds.
Surprise: Corrections Don’t Usually Last Very Long
The average market correction is actually pretty short-lived lasting anywhere between three and four months.
According to data, of the past 20 corrections, only two lasted longer than 100 trading sessions. The longest recent stretch in correction territory was a period of 229 trading days that ended in 1978.
2018 Was a Great Year (Until Recently) and 2019 Might Be Better
The stock market expansion became the second-longest on record in May, 2018.
And, by many estimates, the business fundamentals still look resilient. If the markets bounce from the current correction territory, Money Magazine reports that “the U.S. expansion would in mid-2019 become the nation’s longest ever, based on National Bureau of Economic Research figures that go back to the 1850s.”
If You Don’t Sell, It’s Only a Loss on Paper
If you owned $100,000 of a stock index during a 10% correction, you might say that you lost $10,000. This might feel awful.
However, it is important to remember that if you don’t sell, you only actually lose that money on paper.
Panic Selling Can Be Disastrous
Panic selling is when you get so worried that a market correction is going to continue that you quickly sell. This can be disastrous. Not only are you selling at a low point, but you are likely to miss out on big gains when the market bounces back.
You might be surprised to learn that the stock market’s best trading days typically occur within two weeks of its worst days.
A Correction Can Be an Opportunity
Right now, a lot of people are worried about buying into the stock markets in part because we have seen such an extended period of massive growth.
If you can relate to this, then a market correction can be seen as an opportunity to buy. You probably don’t want to plow all of your money in, but you might start small.
A Correction Can Be a Good Time for a Roth Conversion
A Roth Conversion is when you transfer money from a traditional IRA or 401k to a Roth IRA. When you do this, you pay income taxes on the amount you convert. However, once those assets are in the Roth, they grow tax free, and you do not pay taxes on the withdrawals you make in retirement.
So, doing the conversion when the value of your portfolio is down and you think there is potential for long term growth can be a great idea. Furthermore, 2018 tax rates might make this the best year ever to do the conversion.
Model a Roth Conversion in the NewRetirement Planner.
Cash is Probably Even Riskier than Stocks Over the Long Term
In an inflationary period, the value of cash goes down. A dollar buys less and less with every passing year.
On the other hand, stocks and stock markets generally trend upward.
Cash — whether it is buried in your mattress or sitting in your checking account — is usually a terrible way to hold money, especially money that you are saving for long term goals like retirement.
Imagine that you have $50,000 that you do not need to spend for 25 years.
- If you keep that money in cash. You will still have $50,000 in 2042 (25 years from now) and that cash will likely buy much less than it can now.
- If you put the money in a checking account, you might earn 1% on your money. So, in 2042 you would have: $64,000.
- However, if you invested your money and earned a conservative 6% rate of return, you would have: $223,000 — more than four times the amount you started with!
Long Term Investors Have Always Prospered
Yes. The stock markets go down. However, looking at the historic trajectory of the markets, things have only gone up.
The reason that retirees get nervous is that not everyone can have a long-term perspective. In retirement, you might need to withdraw money for living expenses this month, this year or within the next five years.
Money you will need in a relatively short time period should probably never be invested in the stock markets. However, money that you will use in the future can be invested in stock markets — just preferably not individual stocks which do have significant risks. Index funds can sometimes be a good way for retirees to enjoy growth for their longer-term assets.
Nine Tips for Your Retirement When You Are Worried About a Market Correction
1. Have a Retirement Plan
You can worry a lot less about your finances when you know how you are going to fund retirement. The NewRetirement Planner allows you to create a detailed and reliable plan.
2. Know What You Need and When
If you are considering stock investments, you need to think hard about how much money you need and when and make sure those funds will be available to you — no matter what the markets are doing at that time. The NewRetirement Planner lets you see this in great detail.
3. Plan Conservatively
The NewRetirement Planner allows you to set your own assumptions for different kinds of inflation as well as investment returns. Be sure to assess your plans with very conservative or pessimistic assumptions. Try different scenarios and see how you fair.
4. Guarantee What You Really Need
If you are really worried about a correction, consider guaranteeing income to cover your necessary living expenses. Many retirees buy a lifetime annuity to make up the difference between their Social Security and pension income and their spending.
A lifetime annuity with inflation protection and spousal benefits can go a long way toward alleviating financial anxiety. Model a lifetime annuity as part of your overall retirement plan or use the annuity calculator. You can also talk with a NewRetirement Advisor about the wisdom of an annuity in your particular situation.
5. Consider a Bucket Approach for Your Assets
One method for balancing the desire for growth with the need for stability is a retirement bucket strategy. With this approach you establish different “buckets” or accounts for different types of spending.
- Invest some buckets with more risk in the hopes of more reward — for example, in stocks.
- Invest other buckets conservatively — in cash or bonds, depending on your time horizon.
The new PlannerPlus Budgeter 1.0 is a great way to figure out what you will really need to spend vs. what you would like to spend which can inform how much you can risk.
6. Consider Index Funds
If you want to be invested in the stock markets, consider index funds to give you broad exposure to the markets and not individual stocks which are much riskier.
7. Be Diverse
You should also consider bonds, cash, real estate, derivatives, life insurance, annuities, precious metals and other types of investments.
Not sure about the right mix of investments for your needs? Consider working with a pre-screened and highly certified fiduciary financial advisor.
8. Create and Stick to an Investment Policy Statement
One of the greatest risks to your finances is making emotional decisions. Neither selling out of fear or buying out of unbridled optimism is a good idea.
An investment policy statement is a document to help you make rational ongoing decisions about investments. You can create one yourself or work with an advisor.
9. Get Help if You Think You Need It
Investing and asset management is complicated. Have you considered working with a financial advisor? NewRetirement Advisors is a new service that aims to make working with an advisor easier, more fun and very cost effective. This advisory service uses the NewRetirement technology platform to collaborate with clients for strong financial outcomes — in both good and bad economic times.