What is a market correction?

Of course, the goal of investing is to ultimately see the valuation of your assets in your investment portfolio continue to appreciate. Overall, if you make the right investment decisions this will be the case. However, financial markets do not only move in one direction. There are times when you will see the market go down as well which can result in the value of your investment portfolio also depreciating. A market correction is a particularly large move down.

What exactly is a market correction?

A decline of 10% from a recent peak in a broader market index or a specific asset is what financial professionals technically categorize as a market correction. Generally, a market correction can continue for just a few days or even as long as several months or more. For the most part, the average market correction will continue moving down for three to four months until it hits a bottom.

Can you predict a market correction?

It is difficult to predict a market correction. However, there are some techniques that financial professionals and experienced traders use to try to determine when the next market correction is about to occur. This will include technical analysis combined with fundamental analysis which experienced financial professionals utilize to form a clearer, yet imperfect, picture of the economy.

Market corrections are not easily predictable due to the wide range of forces that can potentially affect the economy at any one time. It is challenging to determine exactly which factor will be more influential in causing the next correction in the market. This can include broader macroeconomic changes or even a single decision by a specific company.

Is a market correction a problem for investors?

For investors who are caught off guard a market correction can indeed be an issue. This could result in an investor becoming panicked and selling for extremely low prices. This may be common for investors with less experience. However, if you have a properly diversified investment portfolio you will likely be able to weather the market correction which generally only lasts for a few months.

Diversifying your portfolio

Mitigating the risk of loss to your investment portfolio during a market correction is important for all investors. Diversification is one of the basic strategies for helping to protect yourself. This means not having all of your money in one market position or in one specific asset class or a particular business sector. You may also want to consider investing in asset classes that have historically shown to retain value during market corrections and times of challenging economic environments.

However, you may not want to only have safe, low risk assets in your portfolio since these types of assets also have low potential for larger returns. Therefore, balance your portfolio based upon your own risk tolerance and your financial objectives. This balance can also vary with a person’s stage in life. For example, millennials tend to be more likely to prefer more risk than those from the baby-boomer generation. Who are likely to have already retired and are living on a fixed source of income.

These are all wonderful questions to be asking yourself in the world we are living in these days! We would welcome the opportunity to discuss the markets with you further. Please do not hesitate to reach out to us to discuss further.