Major U.S. stock market indexes have fallen into correction territory, or a decline of 10% or more in the price of a security from its most recent peak. In terms of this week's correction period, the Dow Jones Industrial Average
There is always a desire to panic in times of market decline, especially with one as rapid as the one the market is currently facing, but this is not a time for investors to act in fear. Historically, corrections of this nature take as little as four months to remedy, meaning the market will most likely bounce-back once the spreading coronavirus disappears from news headlines.
Despite the average correction being short-lived, it is sometime hard to see beyond the decline, especially as indexes continue plunge deeper into the red. It is important in times like this to understand why markets enter correction, how to protect investments, and how a correction can actually be healthy for overall market growth.
How a Correction Works
Corrections can be triggered by a variety of factors, so they are hard to predict entirely--beginning, middle, and end--and can cause significant losses in the short-term. Corrections are like earthquakes. You know you are at risk for them and you can even try to prepare when you see warning signs, but you will never know when the earthquake will strike until it does.
Market corrections can lead to overselling due to panic and, in some cases, cause prolonged market decline. But for the majority of prior causes, corrections mostly present buying opportunities for high-value stocks like Apple
Before a correction, individual stocks and averages may be strong or even over-performing. This seems to be the case of this current decline. For those in the stock-market for the long-term, like those investing for their retirement, a correction is most likely not going to have any material impact on your investments.
Due to the fact that corrections are an inevitable realty for stock market investing, it is best to prepare for them instead of react to them. Portfolio diversification can offer an investor protection, for business-cycle proof stocks like consumer staples--utilities, water and food--usually still perform even in economic downturn.
Although challenging, market corrections are apart of a healthy and balanced market and give investors a chance to readjust asset valuations as well as provide opportunities to take advantage to discounted share prices for when the market starts to grow again.