Daily Gains Letter

Why a Market Correction Is Good for Your Retirement

By for Daily Gains Letter | Jan 9, 2013

DL_Sasha_5One of the biggest worries when it comes to investor sentiment is the possibility of a market correction. I get asked these questions often: what happens if there is a market correction, and how will this affect my retirement?

A market correction is an extreme decline in investor sentiment. Everything in the world cycles, from the stock market to the weather, as nothing goes upward forever. There will never be a situation in which an investment is 100% immune from a market correction. In life, the only certainties (as the old saying goes) are death and taxes.

However, a market correction can be viewed as a positive over the long term. The reason I say that is that negative shifts in investor sentiment stem from the short-term mindset, while the long-term investor can benefit.

A market correction can be viewed as a shift in wealth away from the short-term investor to the long-term investor. If one takes a look back at a historical chart of the S&P 500 over the past 100 years, you will note that even the scariest times in which the market correction felt brutal, on a long-term chart, it was simply a blip and a great buying opportunity.

The crash in 1987 was one of the most dramatic drops in investor sentiment, yet on a long-term chart, it was an outstanding buying opportunity. Even the most recent market correction in 2008–2009 was a great buying opportunity, as the market has essentially doubled over the last few years.

Instead of being scared of massive drops in investor sentiment, the person with a long-term viewpoint should actively be looking for a market correction to add to a portfolio. If an investor were able to accumulate at times of a large market correction, the total return would far exceed simply buying and holding.

Taking advantage of shifts in investor sentiment is, I believe, the way to increase total portfolio returns. Many buy-and-hold investors complain that during the past 10 years, they’ve made no money. That is true; they haven’t made money by simply buying and holding.

However, during the past decade, the S&P 500 has doubled twice, each time following a serious market correction. From the depths of 2002 to the peak in 2007, the market nearly doubled; and from 2009 to the recent peak in 2012, once again, the market doubled.

Going against the crowd in investor sentiment is difficult, but it’s also crucial. This means taking profits when investor sentiment is too bullish and stepping in to accumulate during a market correction.

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