One thing investors come to realize about stock market crashes and corrections is that they’re extremely common.
Since 1950, the S&P 500 has undergone 38 official stock market corrections. This works out to a correction of at least 10%, on average, every 1.84 years. Of these 38 corrections, nine have been official bear market declines of at least 20%. A bear market occurs every 7.78 years, on average.
Of the 38 stock market corrections that have occurred in the S&P 500 since the beginning of 1950, they’ve lasted:
- 13 days to 104 days:24 total corrections/crashes.
- 157 days to 288 days:7 total corrections/crashes.
- 422 days to 929 days:7 total corrections/crashes.
Nearly 2 out of 3 corrections (63%) over the past 70 years have run their course and found a bottom in 3.5 months or less.
Volatility is common
First, accept market volatility — which is relatively common — as a normal part of the process of investing and the best way to outrun inflation. Investors should stay calm even through extreme movements.
Movements up and down can also be a good time to review your asset allocation. If you’re worried about a big drop, you could rotate part of your portfolio into some less-risky stocks to protect from a potential market correction.
Trust in asset allocation
When a market decline hits, your results may vary — and perhaps for the better — if you’ve invested money across different baskets of asset classes. Having an appropriate asset allocation is key to reducing investment risk. Adding diversification within asset classes takes it one step further, helping to smooth the ride through a tumultuous market.
Have an emergency fund
Even if you know that stock market volatility can benefit you in the long-run, financial advisors still recommend having a cash emergency fund on hand so that you can make it through a market meltdown without selling.
If the stock market falls, it’s better to spend the money in your emergency fund than sell assets at a loss that can’t be recouped. An investor would have only needed three months to six months of living expenses in an emergency fund to avoid taking losses during the March 2020 meltdown.
Be ready to buy the dip
Market dips are when fortunes can be made. The trick is to be ready for the fall and willing to commit some cash to snap up investments whose prices are dropping.
You probably won’t catch the stock at its low, but that’s fine. The point is to be opportunistic on investments you think have good long-term potential.
Singapore Expat Advisory
advice@singaporeexpatadvisory.com
Singapore Expat Advisory is an advisory platform for Promiseland Pte. Ltd Pte Ltd and are authorised and regulated by the Monetary Authority of Singapore (MAS).
General Information Only This article should not be construed as an offer, solicitation of an offer, or a recommendation to transact in any products (including funds, stocks) mentioned herein. The information does not take into account the specific investment objectives, financial situation or particular needs of any person. Advice should be sought from a licensed financial adviser regarding the suitability of the investment