Handling Market Corrections Correctly

Today’s political environment and recent volatility in the U.S. stock markets, particularly February’s correction, caused concern for some investors.

If you’ve met with a financial advisor who designed a strategy to fit your individual financial goals, timeline, and tolerance for risk, it’s generally recommended you stay the course.1 But that doesn’t mean to hold steady no matter what.

The occasional market correction (defined as a 10 percent decline)2 can be an opportunity to rebalance. If you’d like help identifying areas of your portfolio that may be ripe for a change during a temporary decline, please give us a call. We’d be happy to review your current financial situation.

Individuals with a longer investment timeline or who would like to see a wider range of diversification may wish to use a correction as a buying opportunity to get into emerging markets (EM). According to one investment strategist, “Compared to the S&P 500, EM equities trade at a lower multiple, are experiencing faster earnings growth, and are poised to benefit from strong global gross domestic product (GDP) growth and a relatively benign U.S. dollar.”3

Note that market corrections aren’t rare or necessarily unexpected. In the 40-year span from 1978 to 2017, there were 22 years that had a correction of 10+ percent.4 One money manager expects a 10 to 15 percent decline in the S&P 500 by the end of the year.5 Others believe the market has bottomed out for the year, with one commenting that the market technicals continue to support a long-term bullish trend.6

The variance in opinions illustrates how difficult it is to try timing the market. To avoid this practice, financial advisors may recommend investing on a weekly or monthly schedule.
Other suggested offerings may include index funds, exchange-traded funds (ETFs) or well-established dividend stocks.7

As always, it’s a good idea to speak with an experienced financial advisor before making any substantial changes to your portfolio, especially with regard to market movements.

1 Joel Johnson. Forbes. April 18, 2018. “How to Bounce Back After a Market Correction.” https://www.forbes.com/sites/joeljohnson/2018/04/18/how-to-bounce-back-after-a-market-correction/#5910818ced05. Accessed April 20, 2018.
2 Ibid.
3 Luciano Siracusano III. WisdomTree. Feb. 26, 2018. “Is the Sell-Off Creating a Buying Opportunity in Emerging Markets?” https://www.wisdomtree.com/blog/2018-02-26/is-the-sell-off-creating-a-buying-opportunity-in-emerging-markets. Accessed April 20, 2018.
4 Arjun Deiva Sigamani. FactSet Research Systems. April 9, 2018. “A Historical Perspective of Market Corrections.” https://insight.factset.com/a-historical-perspective-of-market-corrections. Accessed April 20, 2018.
5 Michelle Fox. CNBC. April 19, 2018. “Brace for a 10-15% market correction this year, warns financial advisor.” https://www.cnbc.com/2018/04/19/brace-for-10-15-percent-market-correction-this-year-warns-financial-advisor.html. Accessed April 20, 2018.
6 John Lynch and Ryan Detrick. LPL Financial. April 16, 2018. “Did Stocks Bottom?” http://static.fmgsuite.com/media/documents/3ce7c6b0-61b8-46f7-959c-4fbb474ad289.pdf. Accessed April 20, 2018.
7 Sean Williams. USA Today. April 4, 2018. “5 investing strategies to survive a stock market correction.” https://www.usatoday.com/story/money/markets/2018/04/04/5-investing-strategies-to-survive-stock-market-correction/33535519. Accessed April 20, 2018.

Content prepared by Kara Stefan Communications
We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.