Financially Speaking Podcast

Whew! Glad that's over with...

Published on August 21, 2015

It seems that we may be in the midst of a good ole stock market correction.  A correction is when a stock market index loses 10% or of its value from the peak. As of this morning, the Dow Jones and the S&P 500 are approaching correction status for large company stocks, while the Russell 2000 is very close for small company stocks.The environment is ripe for fear to trigger irrational investor behavior. 

There is nothing unusual about this correction except that it is very late in coming.  The last correction was in 2011, about four years ago.  Depending on which stock index you consider, corrections occur about every year or so.   Corrections usually last a few months; and then the stock market gets back on track, eventually hitting new highs. Because it has been quite some time since our last correction, this one feels worse, but it is the same.

How should we respond to short-term stock market volatility? Remember that the stock market affects only part of your portfolio-you have a diversified investment strategy.  And no one can predict when market corrections occur or how long they will last. It is hard to struggle with uncertainty, but rational investors will do nothing or will buy more stocks.  On average, stocks gain about 32% in the year following a correction.

Corrections are like tornadoes.  We not surprised when we have one, but we have to think a little while to remember the last one. And everyone knows that there is a clear sky after a tornado. This correction will pass just like all the others have since you were born.

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