Finding the Silver Lining in Stock Market Corrections

Silver Lining

It’s up. It’s down. No, wait. It’s really down. Don’t panic. It’s just a stock market correction. I prefer to think of it as a temporary setback. When it comes to investing, if you are an optimist, you believe that every cloud has a silver lining. Or at least, a bronze lining. If you are more of a realist, you understand that market corrections are a necessary evil on Wall Street, adding stability to the market over time. They are simply a part of the economic cycle. However, if you are an opportunist, you clearly see that a correction in the market doesn’t necessarily have a negative impact on all securities, and it could even add more green to your wallet. So why not strike while the iron is cold?

In many ways, a stock market correction is something that I look forward to. It is an opportunity to buy stocks “on sale”. And who doesn’t like a sale? Before you start hunting for bargains, you need to know how to identify a stock market correction.

Generally, you will see at least a 10% decline (or sell-off) in a stock, bond, commodity, or index. It is much shorter than a bear market or a recession.

According to this article in Forbes, historical patterns in the stock market indicate that “5% corrections typically happen a few times each year. About every 1-2 years, a 10-15% correction happens, and a 20%+ decline occurs about every 3.5 years, on average.” When was the last, legitimate stock market pull back? 2011.

Catalysts for market corrections can range from uncertain economic growth (national or international) to less-than-stellar company earnings. Headlines don’t help, either. CNN recently reported that American Airlines and Delta Airlines saw a drop in their stock price simply because the second health worker from Dallas who contracted Ebola had been on a commercial flight the day before her diagnosis.

Are we currently in a market correction? Possibly. If you are an investor, hang on. A little bit of patience will go a long way. On the flip side, if you are looking for bargains, the approaching holiday buying season could potentially be more jolly, if you are an opportunist.

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One Response to Finding the Silver Lining in Stock Market Corrections

  1. I completely agree with your take. I believe this quote from Warren Buffett can sum up my overall idea on bear markets: “Only to short term traders and market timers are stock market corrections not an opportunity.” We should take advantage of opportune drops in market prices, not cower in the face of losses and fear.

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