It’s not like anyone can control a market correction, but did you know that there are simple steps you can take that will protect your wealth and net worth in the event of a market correction?
There are actually several different steps you can take before and during a market correction to help you move forward in an organized manner. In this article, we will cover how to overcome market correction and maintain your net worth.
What is a Market Correction?
A market correction is defined as a decline in the stock market of 10% or more from its most recent high point.
It is important to note that corrections, which happen frequently, are different from bear markets (a prolonged drop in stock prices).
There’s no question that a decline of 10% or more can cause a lot of anxiety for investors. In fact, it’s only natural to feel concerned when we see our hard-earned money disappear. But we need to remember that corrections are normal — and healthy — for the market.
Markets can’t move up forever without correcting. Corrections provide investors with better prices to buy stocks they like at cheaper prices.
Common causes of Market Correction
We’ve heard plenty of reasons why the coming recession may be inevitable. Here are some of the most common causes of market corrections:
Economic slowdown, contraction or recession – This is the most common cause of a market correction and occurs when the economy slows to a point where consumers are unable to spend on non-essentials and businesses reduce their orders and cut costs.
Rising interest rates – When interest rates rise, borrowing costs increase, causing businesses to reduce investment in new equipment and inventory. Consumers also find it more expensive to buy cars and homes, which means they have less money to spend on other things.
Geopolitical events or uncertainty – Political turmoil can have an effect on markets in two ways — events that cause investment uncertainty (such as elections) or those that result in actual economic impact (such as war).
Currency fluctuations – Major changes in currency values can lead to market corrections because it affects the prices of imported goods and the ability for domestic products to compete with foreign ones.
Elevated Valuations – The historical average price-to-earnings ratio of the S&P 500 is about 16x; however, currently the S&P 500 is trading at about 20x earnings. This means that stocks are more expensive relative to their historical averages and are likely due for a correction in the coming years.
Panic Selling – This is rarely the primary cause of market corrections, but it can exacerbate an existing selloff. For example, if investors are worried about a correction and then they hear news of an unexpected event that spooks them further, they may sell in a panic.
How to Protect Your Money & Net Worth in the Event of a Market Correction
If you’re an investor, a market correction can affect your net worth. While a 10% or 20% drop in your net worth might not seem like a big deal, it can be if you’re close to retirement. If you’re retired and don’t have much money saved, the impact could be catastrophic.
Here are some strategies that can help protect your wealth and net worth from market corrections:
Have an emergency fund
Invest for the long term
Don’t try to time the market
Diversify your investments.
Develop a plan for how you will react emotionally and financially if there is a market correction.
So, what does this all mean? The stock market is volatile today, and nobody knows how it will fare in the months ahead. However, you can take certain steps to protect your wealth and net worth in the event of a market correction.
In many cases, these steps take little effort on your part, but they could have a big impact on your financial future. As we’ve seen before, the stock market may soon try to find its footing again.