First, what is a market correction? It is a drop in stock prices of around ten percent or more after a period of rising prices. A bear market is a more severe form of market correction where prices keep falling and falling for an extended period of time. A bear can begin when a market correction drops prices by twenty percent or more. A stock market gone too long without a correction can lead to a more severe bear market.
One benefit to a market correction is that it can cool an overheated market. This way it can keep the market from going into irrational territory. Too hot a market can lead to a huge crash. A smaller correction creates a pause to reset. The market can then move to higher levels with steadier valuations.
Another benefit is that a correction offers a buying opportunity. You have the opportunity to buy stocks at lower prices. Consider it as if the stock market was on sale. Buying stocks at lower prices offers better future returns on your investment.
Market corrections can test your emotions for investing. This is good. Why? Better to realize your risk tolerance with a correction than with a bear market. You can adjust the riskiness after a correction with minimal loss. Not so with a bear market. Adjusting to your risk tolerance will leave you better prepared to stay the course during the next downturn.
Does even a small drop worry you? You may want to adjust your portfolio allocations before a market correction. Adjusting to less volatile investments before a correction can help you to emotionally weather any losses from the correction.
Market corrections and bear markets are natural parts of investing. Bear markets can be extremely painful. They do present incredible buying opportunities though. Lots of stocks get pulled down in value way below their true valuation. Purchasing these when down can provide excellent future returns.
Stock markets fluctuate up and down. A good market correction can offer opportunities to add to your portfolio. You can start a list of the stocks or ETFs that you want to add but have been too high. This prepares you to buy in sensibly when a correction does occur.
You may want to audit your portfolio prior to a correction. Is it balanced the way you planned? If not, you may want to rebalance prior to a correction. Sell some high performing stocks or bonds and buy some underperforming ones. Also, you can set aside some of that money and buy in after the correction. Just don't forget to buy back in.
Market corrections do present benefits. They may be hard to see when losing money. Their benefits can make you a better investor though.
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Investing $10K in 2014 (Sandra's Investing Basics)
