If you’ve joined the recent investing craze that’s taken over the world, then you’ve no doubt experienced at least one stock market “correction” in your time. If not, then count yourself lucky. Corrections are the result of a certain stock or fund correcting itself after a period of rapid growth and are typically the result of other investors selling off their shares for a profit.
The good news is that, usually, these corrections are only temporary. So, how often so stock market corrections occur?
On average, the stock market experiences a large-scale correction every 1.87 years. However, smaller corrections occur on a stock-by-stock basis every day. Stock market corrections are actually considered healthy and are a strong indicator of a healthy, self-regulating market.
In today’s article, I’m going to give you a solid background on what corrections are, how often they occur, and some of the primary causes of corrections. I’ll also discuss the difference between large-scale corrections and smaller mico corrections, how to plan for market corrections, and what to do if you happen to lose money during a correction. Don’t forget to take notes and share this with your friends who invest!
Understanding Stock Market Corrections
When you first see your investment funds plummeting, it can be a terrifying experience. One day, everything is going good and your stocks, ETFs, and crypto options are on the up-and-up. Then, the next week, your portfolio is dropping faster than a rock thrown in the water. This volatility is one of the primary reasons why you should never “risk it all” on the stock market and why you should always have a backup plan so that you’re never caught off guard.
What Causes A Stock Market Correction?
As I mentioned earlier, stock market corrections are actually healthy and indicate a strong economic environment. As the age-old saying goes, “what goes up, must come down.” Although the stock market has nothing to do with Newton’s Laws of Motion, it is a common principle in investing. The most common cause of a correction is simple- people sell their shares after making a profit and cash in on their investments.
For example, let’s say that [Apple] stock increases by 80% over the course of two years. Many investors will have held on to their shares for that entire tire, biding their time and waiting to sell them off for a profit.
Then, suddenly, the time is right and many of the major investors begin selling off portions of their shares and re-investing their profits into other stocks or cashing out their portfolios into fiat currency. However, there are a few other reasons why stock market corrections occur.
The political climate of a country often has a lot to do with the market. When the governing political party encourages a strong economy and lowers taxes, the citizens have more faith in the markets and tend to invest more into public companies. Conversely, when the ruling government appears more volatile, less trustworthy and imposes more regulations/taxes, then many investors tend to be skittish about their investments. This, in turn, can trigger people to start selling their investments and be the catalyst for a market correction.
Recent Press and News
Recent news and press can also trigger a correction. For example, let’s say that a large tech company is exposed in a scandal or they’re hacked and user data is stolen by hackers. The news of this could cause distrust in the entire tech sector and see investors rushing to sell off their tech shares before the value drops too much.
Quick Rise In Prices
Anytime that a stock increases exponentially over a short period of time, it’s almost guaranteed to “correct” as the investors who made a profit cash in and sell their shares for cash.
Large-Scale Market Corrections Vs. Micro Corrections
According to studies performed over time, large-scale market corrections happen every 1.87 years. This is natural and is a phenomenon that has been observed over the course of a hundred years since the stock market first came into existence.
However, micro corrections can happen on a weekly basis. These micro corrections are typically the result of some of the reasons I listed above, including:
- Recent news and press about markets/companies.
- Rapid price increases.
- Market volatility.
- Political climate and news.
Do Cryptocurrency Markets Experience Corrections As Well?
As stock market investing has become widely popular over the past year, people have also been investing in crypto heavily. This is largely because several popular trading platforms such as Robinhood, Webull have incorporated crypto trading into their stock-trading app.
That being said, cryptocurrency markets are just as liable to experience a correction as the traditional stock market. In fact, crypto markets are known for their high levels of volatility, making them one of the more risky investment opportunities.
Are Stock Market Corrections Bad?
Although they’re certainly a pain, stock market corrections are not bad. They indicate a healthy economy in which investors are watching the news, paying attention to what’s going on in the market, and making informed buying/selling decisions. The trick is to make sure that you’re always “in the loop,” so that you can take action before your investments drop too low.
I Lost Money In A Correction… Now What?
Corrections are a normal part of investing in the stock market. This is why you should always try to create multiple streams of revenue and never rely too heavily on one investment. So, assuming you’ve recently lost money during a correction (large-scale or micro correction), what should you do next? Here are a few options.
Sometimes, the best course of action is to just remain patient. Stock market corrections often are not permanent and your investments will likely rise back up to their previous value or higher if you give them a few months to re-correct. Often, a stock market correction can encourage investors to take advantage of the lower prices and buy up the cheap stocks in hopes that they’ll one day be worth more money. This was very common during the beginning of the COVID pandemic when the markets plummeted to rock-bottom.
Cut Your Losses And Re-Invest
If you’ve done your research and you’re convinced that your stock options are not going to increase in the near future, then you may consider cutting your losses before prices drop too low. You can sell off your investments and try puting them into a more stable ETF or commodities such as gold or silver that have historically remained more stable.