Amid rising Covid-19 case numbers and potential tax increases, a slew of stock market analysts have been predicting the coming of a “full-blown” market correction for weeks now.
That might have you spooked. But … what exactly does it mean? And should you care?
Let’s break it down.
Typically, a market correction refers to a drop in a major stock index — like the S&P 500 or Dow Jones Industrial Average — by between 10% and 20% from a recent high. Corrections aren’t necessarily negative: In fact, historically, they are viewed as “correcting” prices to better reflect their true long-term value.
Seeing the value of your holdings tumble can be anxiety producing. But market pullbacks are normal, and occur most years, says Shawn Snyder, head of investment strategy at Citi U.S. Wealth Management. The headlines are no reason to stop contributing to or pull funds from a retirement investment account, he says.
“Don’t worry about these corrections,” Snyder says, especially if you have decades left until retirement. “Millennials are absolutely fine continuing to hold [stocks] at a high level.”
It also isn’t guaranteed that a correction is imminent (analysts have been wrong before). That said, if you have money invested that you might need in a year or two — say for a house or car payment — then you might want to reconsider investing all of those funds. Financial experts typically advise keeping funds you’ll need in the short term in an easily accessible, safe account, even if interest rates are low.
But if a correction does come, holding a diversified portfolio until retirement is still the best way to build wealth, Snyder says. A 10% dip every now and then won’t disrupt that, at least historically speaking.
Don’t focus on this one moment in time when it comes to investing your money; focus on the process over time. Take the past year and a half, for example. March 2020 saw the end of a historic bull market and a resulting massive stock drop. But now, the market is routinely hitting record highs.
“If you went on vacation in February of 2020 and didn’t pay attention to the news, and came back in February 2021, you would think the stock market had a great year,” Snyder says. “You wouldn’t know everyone thought the world was going to end.”
