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How Often Should You Expect a Stock Market Correction?

edited January 23 in Fund Discussions
Ben Carlson reports on the frequency of corrections/bear markets/crashes for the S&P 500, Nasdaq Composite Index, and Russell 2000.

"It is important to remember this is just something that happens from time to time in the stock market.
The only reason you get high returns over the long run is because you occasionally experience losses in the short run. This is a feature, not a bug."


I wholeheartedly agree with Mr. Carlson's closing statement:
"I suppose there are some investors who can change up their strategy from bull markets to bear markets but I haven’t met too many who can do so consistently. I’m a much bigger fan of creating a portfolio that takes corrections and bear markets into account when you create your investment plan. You should strive to create a saving and investing process that is durable enough to handle both up and down markets."
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  • edited January 24
    I actually disagree. This analysis is treating the human, all too human stock market’s performance during a correction like it’s a scientific or natural phenomenon like precipitation or a gravitational force that manifests itself at regular if not predictable intervals. It isn’t. The market is a bundle of irrationality. The one semi-rational aspect of it is valuation and the distortions possible regarding it to both the upside and the down can be extreme. I would say the higher the valuation and the greater the current macro risks, the greater the potential for frequent corrections as investors try to accept, i.e., rationalize the lower future cash flows per share they own. By contrast, the lower the valuation and the more macro risks decline, the less likely a correction is. But the notion that in the long run stocks must rise like the sun if you just buy and hold and stomach corrections is a myth that only has been true in the past and won’t necessarily be true in the future. The stock market is not a force of nature.
  • @LewisBraham,

    Your last two sentences, could not agree with you more.

    So rhymes with real estate..."it always goes up"...said virtually ALL prior to 08'.

    While it is true, good companies generate positive cash flow and earnings...the weaker one's should be bought out or go under, thus the market trends up over time...your point of human nature and psychology being involved spot on.

    I wonder how many who will be absolutely blasted in this "back to reality storm" will be scarred from the beating and stay away from the markets for the balance of their lives...talk to old folks who went thru the depression...they will tell you what they think about bankers, stonk markets, etc.

    And now we wait until what Weds with our "investments", savings and hopes and dreams on the line based on what one dude has to say, meaning JP?

    And the clown polticians play around with potential warfare that could bring about trajedy and the end of civilization as we know it for all involved...I got an idea, send their kids with a knife into a cage and have them fight to the end to decide it. Spare the rest of human kind.

    What a farce, eh?

    Best,

    Baseball Fan
  • edited January 24
    “The market is a bundle of irrationality.”

    I grew up in the 50s and 60s. Both parents harbored vivid memories of the ‘29 stock market crash and Depression through which they lived. So stocks were somewhat of a dirty word among many (if not most) working class families in my childhood years. Few of ordinary means owned them.

    (I tried to elucidate further but got trapped in an endless quagmire of words ….:) ) However, I do see human irrationality playing a big part in the markets of recent years. That includes not only equities, but assets like real estate, bonds, crypto. And further, that uniquely human ingredient compounds the difficulty of determining where true value exists and where’s there’s mostly fluff.

    In early November I wrote: “I’ve never seen such heightened speculation across the wide investment spectrum … “

    This Time It’s Different? / MFO Discussion Topic
  • However, I do see human irrationality playing a big part in the markets of recent years. That includes not only equities, but assets like real estate, bonds, crypto. And further, that uniquely human ingredient compounds the difficulty of determining where true value exists and where’s there’s mostly fluff.
    This time is really NO different, but perhaps worse just as you pointed out. Now we are facing several challenges: geopolitical (Ukraine, Taiwan, and to a lesser extent N.Korea), high inflation globally, and pandemic-induced supply chain issues. Feel like we are revisiting the spring old 2020.
  • To answer the question posed in the title, historically every 18-24 months.
  • "I grew up in the 50s and 60s. Both parents harbored vivid memories of the ‘29 stock market crash and Depression through which they lived. So stocks were somewhat of a dirty word among many (if not most) working class families in my childhood years. Few of ordinary means owned them."

    @hank- Exactly the same here. Given that, it would seem reasonable to think that the market action in the 50s / 60s would not be comparable to the present time, when everybody and their brother, experienced or not, is trying to beat the market.
  • edited January 25
    General human behavior is something that rarely changes over time.
    Irrational investors have caused or exacerbated bubbles and crashes for hundreds of years and will continue to do so.
  • edited January 25
    “I suppose there are some investors who can change up their strategy from bull markets to bear markets but I haven’t met too many who can do so consistently. I’m a much bigger fan of creating a portfolio that takes corrections and bear markets into account when you create your investment plan. You should strive to create a saving and investing process that is durable enough to handle both up and down markets."

    It’s an unanswerable question. Corrections are about as unpredictable as the weather. And they can vary as much in intensity as well.

    I doubt if there’s any one good way to prepare. Maybe you shouldn’t even try? Many here, wiser than me, keep several years’ cash reserve on the side so they don’t have to withdraw portfolio money during a correction. Personally, I’m conservatively enough invested and diversified enough that I can continue withdrawing $$ during a multi-year correction without doing a lot of damage. There’s a cost to that in that I can’t take as much risk and reap as bountiful a reward during the the good times.

    How often to expect? Geez. I’d like them more often - maybe every year or two - because I think the severity would tend to be less than if we go 3, 4, 5 years without one. And, there’s a school of thought (ie Grantham) that we’re spoiling for much worse than a routine “correction.” I’m not endorsing Grantham - just tossing that out there for thought.
  • edited January 25
    "Corrections are about as unpredictable as the weather. And they can vary as much in intensity as well.
    I doubt if there’s any one good way to prepare. Maybe you shouldn’t even try?"


    Corrections can occur at any time and sometimes for no particular reason.
    My preference is to have a portfolio which can do reasonably well during both bull markets
    and bear markets with maybe a little extra emphasis on downside protection.
    Asset allocation and overall risk characteristics should be deliberated.
    Small adjustments can be implemented as needed over time.
    Since I'm not a skilled trader, I'm not going to play that game.
    This type of portfolio won't be the top performer during raging bull markets but conversely
    it won't be at the bottom of the heap during snarling bear markets.
    It will also help minimize regrets which may prevent me from doing something stupid!
  • edited January 25
    +1

    Actually my previous post pertained more to bear markets than run-of-the mill corrections. I’m not attuned to the finer points, except bears tend to last longer - usually measured in years. That’s why many keep the cash reserve.

    If the early morning numbers hold up or get worse, we’d probably be in correction territory in most
    markets. Calling it a bear would be premature.

    Qtr 1 of 2020 was somewhat unique. Huge 15-25% selloff across many asset classes in 2 or 3 months. WTH that was, I’m not sure.
  • Jason Zweig, WSJ:

    "I don't know whether we're on the cusp of a cataclysmic decline, or whether this is one of the market's normal see-saw rides.

    What I am sure of is that after two years of being cooped up at home with nothing to do but stare at market charts, a lot of my colleagues in the financial media are bored stiff.

    So reporters and editors will seize every opportunity to turn market molehills into mountains, and to extrapolate every drop into a correction or bear market.

    As the markets buck and heave over the next few days, I would advise you to keep in mind one of Benjamin Graham's most important messages from his book The Intelligent Investor:

    Price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal."
  • Correction is 10% loss;20%loss is bear market;50% loss is a crash. 2020 qualified as a short-lived bear market-perhaps computerized trading will lessen the length of bear markets going forward.
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