Market Corrections

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We all know that anything in excess is never good over the long term. Not only does excess breed complacency, but unsustainability as well.  This holds true with regards to stock market growth. As the markets have experienced nothing but continuous growth since 2009, investors have become accustomed to this upward trend and desensitized to the fact that the market would eventually need to pullback. Although market corrections may be viewed as a detriment, when analyzed in the appropriate context, they happen to be a very necessary evil. In today’s market environment, it is crucial to understand the role that market corrections play. With a clear understanding, investors can take advantage of potential buying opportunities while mitigating the downside risk that can result from these pullbacks.

What is a market correction? A market correction is a decline or downward movement, of at least 10 percent, of any stock, bond, commodity or market index. These pullbacks that we have come to recognize as market corrections, tend to last a shorter period of time when compared to bear markets. It is important to note that not all market declines are corrections. Based on past corrections, there are some indicators that may help an investor discern whether or not the market is experiencing a correction.

 It is very easy to mistake a market correction with a bear market or capitulation. A correction differs from a bear market in a multitude of ways. For one, corrections are shorter in length and tend to be far less severe than the declines seen in a bear market. Historically, it is common that market corrections manifest once the market has become overbought. Lastly, in a market correction, bottoms are formed far more quickly than in a bear market. Delineating between a market correction and bear market can be challenging at times, however, making this distinction can bode well for the long term investor.

How can an investor with a long time horizon benefit from a market correction? First and foremost, a 10% correction can reduce values and prices in the equity market. This may give an investor, who otherwise would not be able to afford such stocks, the ability to purchase the holding during that correction. A prime example of this type of investor would be Millennials. This demographic tends to look for market pullbacks in order to obtain stocks at lower prices, higher pidend yields and lower valuations.

Another potential advantage that may result from a market correction can be for those investors who are looking to increase their position in a company, they are already invested in, at a discount. For pidend seeking investors currently invested in a stock, their reinvested pidends actually go further, as they are being reinvested at a lower price. Additionally, there is an added benefit for those employees who already have an active retirement plan that they currently and continue to contribute to. When the market is in correction territory, their contributions actually go a longer way since the market is down and their contribution (whether or not it has increased) will buy more shares.

It is also very important to note the benefits of a market correction for those investors whose portfolios get rebalanced. The purpose of rebalancing is to sell those assets that have appreciated in value and to do so during a market correction, allows the investor to buy low and sell high.

In a market environment with significant declines, it is crucial for investors to discern whether or not this is a correction or a bear market. Although market corrections may seem doom and gloom, there are many potential advantages that investors can benefit from. How did your portfolio fare in the recent market correction? You should contact us today at (631) 952-4466 x12 to see how Mitlin Financial can help devise a market correction game plan for your investment portfolio.

Disclaimer: This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.

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