“We’re overdue for a stock market collapse.” “This could be the big one.” This is what you hear when you turn on the news or read magazines and newspapers. After the great bull market run from 2009 to today, many are predicting the stock market is going to drop. Depending on who you listen to, this drop could be as little as 5% to as much as 30%. With so many “experts” telling you the market is going to drop, how does an investor invest their money now and still be successful? Should you be afraid of a stock market pullback?
What Is A Stock Market Correction
By definition, a stock market correction is when the stock market drops by 10%. This usually doesn’t happen in one day’s time, but rather over time, say a few weeks. While 10% might sound like a lot, this type of a decline is actually common. In fact, a stock market correction occurs roughly every two years.
If you look at the chart below, you will see how common it is for the stock market to decline by certain percentages. Knowing this information will go a long way to ensuring that you are a successful investor.
How To Use This Information To Your Benefit
There are two common reactions you can expect when someone talks about a stock market correction. The most common reaction is to sell everything and run for the hills. Sadly, it is this exact action that causes most investors to fail when it comes to investing.
The second reaction is to look at the chart above and try to time the market. Again, this is another reason why so many fail at investing and think it is rigged against them.
So how can you use the chart above to your advantage? All you have to do is remember it. The stock market is going to drop. You can’t stop it. You can’t predict it. All you can do is go along for the ride.
Think of the stock market as the ocean with high waves. Your investments are a boat sailing along. When you see a large wave come your way, you can either:
- Turn and run and get crushed by the wave
- Ride full speed into the wave and ride it out
Neither option is a fun option. But riding out the wave is the safer and the smarter of the two options. When you run from the stock market, you are simply locking in losses. You sit on the sidelines until the volatility or the waves subside, then you wait a little longer, just to be safe. Finally, you jump back in only to realize that another storm is on the horizon.
Taking A Long-Term Approach To Be Successful
The only way you will be successful when investing is to take a long-term approach. This means you invest in high quality stocks and bonds, either individually or ideally through low cost mutual funds or exchange traded funds. Once you start investing, you keep investing, regardless if the stock market is up, down or sideways.
It doesn’t matter to you what the market is doing on a daily basis. You are invested for the long-term. Know that the market declines on a regular basis and therefore you cannot jump in and out hoping to make money. You invest on a regular basis. This ensures that you will be buying when the market is low. Yes, you will be buying when the market is high too, but the current market high will most likely not be the market high in a few years. It will instead be a low point.
Investing in the stock market isn’t a complicated thing. It gets complicated when you let your emotions into the picture. I understand me telling you this is easier said than done. But to make it easier for you, print out the chart above of how frequently the market declines and post it somewhere close so that you can reference it when the market drops. Use it to remind yourself that over time things will be OK. After all, when you take into consideration how often the market does drop, and we are sitting near all-time highs, it just goes to show that the stock market does recover from these drops. Therefore, a long-term approach is a winning approach and will make you money in the stock market.
Author Bio: Jon blogs over at Money Smart Guides where he helps readers pay off their debt and start investing for their future. If you want to learn more about either of these topics and take control of your finances, be sure to read his blog.