HomeInvesting LessonsWhat Are Stock Market Corrections ?

What Are Stock Market Corrections ?

“Each of us must confront our own fears, must come face to face with them. How we handle our fears will determine where we go with the rest of our lives. To experience adventure or to be limited by the fear of it.”
–Judy Blume

One of the most common reasons people don’t invest is the fear of failure, the fear of losing money. In an earlier article on What Stops Us From Investing we looked at some of the reasons why we don’t invest. And fear is one of them.

But should you cow down with your fears or learn to handle it better. With this in context, it’s good to understand history and understand what has happened in the past when people have been fearful.

We will look at stock market corrections with this lens.

A stock market correction is defined as a decline of 10% or more (up to 20% after which its categorised as a bear market) of a major index such as the S&P 500 or Dow Jones Industrial Average or the NASDAQ from its last 52 week peak.

Understanding this is important as this arm you with the information to be less fearful of the markets and guide you through the peaks and troughs.

You do need to understand that stock market correction is used to refer to a collective, a collective of the market as indicated by a major index. Individual stocks dipping below 10% of its most recent peak is much more frequent as compared to a stock market correction and can be termed a correction of the stock.

Stock correction should be looked within the lens of the overall stock market correction. The reason I say that is because both of these provide two views that an investor should be mindful of. And fear should be looked at from that lens.

When we are fearful of a stock market correction, we shouldn’t be as fearful as history shows that stock market corrections are infrequent. As per a CNBC report of Feb 2020 how long stock market corrections last there have been 27 stock market corrections from World War II including the one for coronavirus in 2021 up until today 7th of March 2021.

When we look at an aggregate level (at stock market level), on an average a stock market correction happens every 2.77 years.

TheTwigg’s take: What we infer from the above is

1. that at an aggregate level, we need not be as fearful of the markets as we are. We should use history as a guide to prepare and be ready if there is a downturn of such a magnitude.

2. At an individual stock level, there would be infinite number of examples of stock correction. Investors should pick their stock carefully and be aware of the risks on the downside

3. Experience stock markets adventure and don’t be limited by the fear of it. If you prepare well, you will do well.

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