Recently, the market have been very bumpy despite an optimistic start at the beginning of the year.
S&P 500 dropped 6.6% in May, which is, according to Bloomberg, its second-worst performance since 1960s.
The real question isn’t about whether or not there will be a stock market correction in the near future. But rather, what are the basic things you must know about one.
Stock Market Corrections Occur More Frequently Than You Think
The first thing you must know is that stock market corrections are not at all uncommon. Investors may still be surprised at a sudden drop of the stock market heads, but the truth is, it happens all the time.
In reference to the data researched by Yardeni Research, there have been 37 stock market corrections of at least 10% since 1950. There’s no way we can foresee an upcoming market correction, but know that it takes place more often than you realize.
Corrections Are Most Likely To Last For Only A Short Period Of Time
The data since 1950s proves that stock market corrections are typically short-lived.
There are several reasons why corrections usually don’t last long. For instance, short-selling includes borrowing money. The interest you pay to your brokerage to bet against equities makes short-selling more expensive than simply purchasing a stock yourself. As an outcome, downside bets are inclined to be of the short-term variety.
Buying A Stock During A Correction Is A Wise Choice
If you buy new stocks or add to existing positions during a correction, then it’s pretty much a win as long as you stick around.
Generally, it takes just weeks or a few months for you to completely gain back all your losses, just like what we have witnessed at the beginning of the year when it recovered 20% decline that took place in the last quarter of 2018 within just a few month.
In some cases, it may take years to fully recover.
But ultimately, buying a stock during a correction is most likely to land you a greater fortune at some point in the future.