Just a friendly reminder of something I have been preaching consistently for years:
Stock market corrections are normal.
Over the past couple of weeks we have seen markets start to move lower, culminating in a big panic sell Monday morning. Every news outlet is screaming about a crash and stoking the fear as they always do. I’ve already seen this correction being weaponized and politicized. How predictable. You’ll never catch the news passing up on an opportunity to cause panic. But not me. Because we know that stock market corrections are normal, even in bull markets.
The stock market, as I’ve show you many times before, experiences a 10% or greater correction almost every year. In fact, the average year sees a 14% decline from top to bottom at some point. Where are we at with today’s selloff? About 10% from all-time highs. It may go lower, or it may not. I don’t have that crystal ball. But I do know one thing….
Every stock market correction or crash in history now looks in the rearview mirror like a generational buying opportunity. I’d challenge you to go back and find an instance where selling out of the market when it was down was a prudent long term strategy that created future wealth.
In late 2018 the S&P 500 dropped 20% in just about a month….anyone who sold then would be kicking themselves just a few months later.
In 2020 when COVID hit the market fell 30% in a month….anyone who sold during that time was kicking themselves later that year.
In 2022 the market fell 25% over the course of a year. Today, anyone who sold during that bear market would be kicking themselves.
On the flip side, anyone who viewed those market pullbacks in the moment as opportunities to accumulate shares in the stock market at sale prices created significant future returns for themselves. Wealth was created for prudent investors during those past corrections. And anyone who simply held on to their investments was not only made whole, but rewarded with future gains. The only people who “lost” in previous downturns are those who thought they were protecting their wealth and sold. All that did was lock in what would have been a temporary loss and make it permanent. All that did was remove assets at a low point and eliminate the potential for future gains on those dollars. All that did was create a lot of future regret.
All of that to say this…..Every market correction/pullback/crash or whatever you want to call it….Is an opportunity. It is an opportunity to destroy wealth and an opportunity to create future wealth. Those who listen to the talking heads and the fear mongers online or on TV will probably be led to make a decision that destroys wealth. Those who remain calm and patient and understanding of the fact that corrections are normal can use moments like these to create future wealth by either staying invested or deploying new capital to increase their exposure to the stock market while it’s down.
Think about it like this....Why is it that the stock market is the only place on earth that people run for the doors when thing go on sale? If you were in the grocery store and they announced over the loud speaker that the entire store was going to be 15% off, nobody would say “screw this” and run out the door. No, the opposite would happen. People would use that opportunity to accumulate more food at lower prices. But the difference between food and stocks is that the food is not going to appreciate in value in your refrigerator and create future wealth for you. But the stock market can. And historically, it always has. So why do folks have the urge to run for the doors and sell when the markets are down?
One word: Emotion.
Fear is our most powerful emotion and unfortunately it rarely leads us to make prudent decisions. And in moments like this, most of the information we are consuming on a daily basis is telling us we should be scared. But I’m telling you not to be. I’m certainly not. I’m telling you that selling into a market selloff is not a prudent investment strategy. I’m telling you that a 15% correction is normal. I’m telling you that every past correction, regardless of magnitude, looks like a great opportunity in hindsight. Does it suck right now? Of course it does! There can be no long term gain without persevering through periodic bouts of pain. We know this. We accept this because the benefits of long term investing have far outweighed the pains of periodic downturns.
So, if every past market correction in history turned out to be a great opportunity to create future wealth, then why would we sell into this one? Or the next one? Or the one after that? We shouldn’t. We should lean on our understanding of the history of the stock market and remain calm while others around us panic.
There will be a lot of wealth lost and created by this correction just as their was in all past market downturns and just as their will be in all future downturns. History shows us who usually comes out on the right side of that equation and it is those who stayed calm, stayed patient, and stayed invested.
Ignore the noise. Stay calm. Go out and enjoy the day. The sun will rise tomorrow. And at some point in the future I’m confident we’ll look back at this correction the same way we view all of it’s predecessors. A temporary opportunity to make a good or bad decision.
Thank you for taking a few minutes out of your day to read this!
NZ
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. No strategy assures success or protects against loss.