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Why Stock Market Corrections Are Good For You

Last week, the stock markets took a three-day dive that shaved more than 5% off the major stock indexes. I look at these kinds of haircuts as a good thing. If you’re wondering if I’m involved in some sort of esoteric short-selling or market timing activity, fear not, I’m not. No, I think of periodic stock market drops like we experienced last week as a good thing because it reminds us that markets can and will go up and down without warning and without logical explanation. Market drops remind us of three lessons that we must not forget:

  1. The future is un-knowable so ignore anyone who claims to know what will happen next.
  2. Stocks (and to some extent bonds) go up and down in value and it’s foolish to think that markets only go one way. Mindset is everything my friends. Do not let greed or fear override history or common sense.
  3. Asset allocation is king; for example, when the S&P 500  index lost 5% of its value last week, a 50/50 diversified portfolio lost 2.5%. Now, 2.5% is not easy to watch, but it’s a whole lot better than watching a 5% loss.

If you are more than five years away from your retirement date, the latest market movements are a big “so what?” However, if you are within five years of your retirement date, you might be getting nervous with this kind of market action. If this is you, focus on point #3 above. That is, your investment portfolio should be allocated as if the stock market will go down by 5% or more at any point. You need to have your portfolio allocated in such a way that a 5%, 10% or even a 20% loss in the stock markets would not change your retirement plans. If your portfolio is not allocated in this way, then take action now to correct this error. Because as you know, the future is un-knowable, right?