“Market correction doesn’t destroy long-term wealth. Your reaction to it can destroy long-term wealth.”
Daily fluctuations in the stock market can turn profits into losses at a moment’s notice, and vice versa. To get a better idea of the stock market’s performance and growth (or lack thereof), you should look at a longer period, like a few years or a decade.
Indexes are used as benchmarks to gauge the movement and performance of market segments.
In India, Sensex is the benchmark index and provides a gauge of India’s economy.
What is a Market Correction?
What is a bear market?
What is the difference between a market correction and a bear market?
Do market corrections lead to a bear market?
What should you do when there is a Market Correction?
Read through to discover all the answers and also be aware of the dos and don’ts during a market correction.
Table of contents:
- What is a Market Correction?
- What is a Bear Market?
- Market correction vs bear market
- Insight from the analysis
- How an investor like you should react when there is a Market Correction?
- Stick to your Investment Fundamentals during a Market correction
First, let’s look at Market Correction.
What is a Market Correction?
A market correction is usually defined as a decline of 10% -20% of an index from its most recent peak. Many factors can trigger a correction viz. macro-economic factors, overheated market, etc.
An index may fall into correction either briefly (days & weeks) or for a sustained period (months & years). This may lead to panic stations for many investors.
We should understand that it is just an indication of a potential reset.Now that you know what a market correction is, let’s see what a bear market is.
What is a Bear Market?
A bear market is a period where markets decline by 20% or more. It can be short-term (a few months) or long-term (a few years).
A sluggish economy, bursting market bubble, war & political unrest may trigger a bear market.
Herd behaviour, fear, and a rush to protect downside losses can lead to prolonged periods of a bear market.
Now let’s see the major difference between a Market correction and a bear market.
Market Correction Vs. Bear market
A correction is just a cyclical event whereas a bear market is deeper & has a greater impact.
In a correction, investors are still optimistic but, in a bear market investor sentiment is more negative. Nobody can predict whether a correction can turn into a bear market or get reversed (bull).
Historical data depicts that not all the corrections have turned into a bear market. Let’s analyze the past market corrections.
Below is a bar diagram that shows the market corrections and the bear markets.
Analysis of the past Market corrections:
From the above bar diagram, you will find that there were only 4 market corrections that have become bear markets (the red bars) from the year 1991 to 2022.
And below is a tabular column that shows the dates of the bear markets, the reasons for the bear markets, and also the percentage of change in the bear markets.
Insight from the analysis:
When historical data is analyzed, there have been 22 market corrections (> 10%) since 1991, and only four of them became bear markets (>20%), in the years:
- and 2020
Now let’s take a look at the Sensex days up and the down percentage.
Sensex Days up Vs. Down percentage (1991-2022)
Up days – 53.13%
Down days – 46.87
“Prepare yourself to face the market correction, market crash, and recession. Then invest.”
Now you would have understood that not all Market corrections lead to bear markets. So what is that you should do when there is a Market Correction? Let’s find out.
How an investor like you should react when there is a Market Correction?
The answer is not to react but respond when there is a market correction.
How is it done?
The solution is right here below.
- Practice discipline & stay invested.
For eg: There is a stock market crash and you stop your SIP. This is a reaction that should not be allowed.
So how should you respond?
Respond by staying invested and practicing discipline.
- Corrections give an opportunity to buy high-value stocks at a discounted price.
- Don’t follow herd behavior.
- Keep in mind that crashes are inherent to the stock market while recoveries have also been consistent. Staying invested in the long run will help you to survive such crashes with ease.
Far more money has been lost by investors preparing for corrections or trying to anticipate corrections, than has been lost in corrections themselves. –Peter Lynch
There are 3 Crucial lessons to be learned from the past stock market crashes. Want to discover them? Watch the video below.
What else should you be doing when there is a market correction?
Stick to your Investment Fundamentals during a Market correction
- List down the life goals & the amount required to fulfill them. Draft a plan, this will help to stay intact even when the road is bumpy.
- Consider investing in various assets (diversify) depending upon your risk tolerance & timeline of the goals.
- Market volatility can skew asset allocation. Better use the market correction to rebalance your portfolio.
- Investors saving for a goal that is due in 10 or more years, have time to potentially recover from a market drop. If the goal is due in the near term, then shift the investment to a stable asset class. So that you won’t miss your goal.
No bear market runs forever. the Bear market slump is short-lived compared to the bull market rally. Decide according to your investment plan / financial plan. Don’t allow panic to sway your decision. Stay the course & reap the advantage when the market recovers.
It’s better to ask an opinion from your financial planner since this fund is subjected to high risk.
If you have any comments or questions, write them in the comment box below.
Or are you interested in creating a Comprehensive Financial Plan for your financial goals?
Skip the queue by registering for your 30 Minute FREE Financial Plan Consultation. Click the ‘Register Now!’ button below.