Investors, Don't Panic Sell: Here's What Usually Happens After Stocks Enter a Correction
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The stock market has had a rocky week, with dips into correction territory.
A market correction, which is a 10% to 20% dip in stock prices from their most recent highs, is scary when it happens. But afterwards, markets tend to rebound — often, they rebound quite well.
In fact, for every time the S&P 500 has dipped at least 10% since 1980, the index was higher one year later 90% of the time, and up 25% on average, according to data from LPL Financial.
"Volatility is normal," says Ryan Detrick, chief market strategist at LPL Financial. "As uncomfortable as this feels sometimes, you have to pay to play."
Sometimes the returns a year or two years after a correction are quite significant. For example, after stocks hit bottom in 2009, the S&P 500 — a common benchmark used to measure how stocks are doing in general — was up 68.6% one year later, and it was up a total of 95.4% two years after that low. The one-year return after the market crashed in March 2020 was 74.8%.
This is why you really don't want to panic sell, Detrick says. Of course, it's temping: In March of 2020, investors raced to push their cash on the sidelines, pulling $326 billion out of mutual funds and exchange-traded funds, according to Morningstar.
Many experts have been saying that a stock market correction is expected. And when stocks enter correction territory, it's actually a great opportunity to add to your portfolio, Detrick adds. An investor who bought stocks during that 2020 market low would have doubled their money by August 2021.
The danger is that if you pull your money out on a bad day, that money could also miss out on the market's best days. An investor who missed the market's 10 best days between 2001 and 2020 would have cut their returns in more than half, according to J.P. Morgan Asset Management's 2021 Guide to Retirement.
As Jim Paulsen, chief investment strategist at The Leuthold Group, told Money earlier this week: "Stay focused on where you might be a year from now rather than where you might be a month from now."
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