Market Wrap-up for Jul. 10 - Embrace the Correction

Market Wrap-up for Jul. 10 – Embrace the Correction

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Much to the bulls’ frustrations, the long-awaited correction might be creeping onto the scene. Whether it’s looming tensions in the Middle East and Europe, or fears over the Fed’s next move, investors have plenty of reasons to take profits now as major equity indexes sit on hefty gains.

So, is a long-overdue pullback a good reason to worry and run away from the market? Absolutely not. In fact, today we’re taking the time to highlight why no correction should ever scare you away from the market entirely.

3 Reasons Not to Get Rattled by Any Correction

Don’t get us wrong, if you’re sitting on meaningful gains from positions you acquired since the start of this epic five-year bull market, by all means, take some profits off the table. However, if recent headlines about the impending sell-off are your motivation to pull out of the markets, it may be a wise choice to reconsider your reasons. Below are three things to keep in mind when a correction hits:

  1. Markets are Cyclical: Corrections are, and always will be, a normal part of the market cycle. While steep pullbacks may scare you into thinking we’re headed for disaster, just remember that over the long-term, the stock market cycle undeniably boasts a definitive upward-trending bias. In other words, if you stick with a long-term investment horizon, which we strongly advocate, corrections are merely a pause in the markets’ ascent [see also Market Timing the Best and Worst S&P 500 Trading Days].
  2. Use the Opportunity to Rebalance: If we accept the fact that corrections are a normal and healthy part of every bull market, our options are greatly expanded; that is to say, when a pullback rolls around, instead of panicking, you can use the sell-off as an opportunity to tweak, but not entirely overhaul, your portfolio. We’re big advocates of scaling into and out of positions, and as such, any correction should be welcomed with open arms because it serves as an opportunity to lock-in some profits and also set your sights on new, more affordable, high-quality dividend stocks for your portfolio.
  3. Abandoning Exposure Is Costly: One of the most surefire ways to accumulate wealth is to harness the power of compounding returns; this is something you can’t do if your portfolio is in 100% cash as you wait (and wait some more) for the market to rebound. Maintaining exposure to the market over a long-term horizon is one of the vital steps along the road to riches, which is why jumping out entirely can prove to be more costly than weathering the downturn and using it as an opportunity to reposition your assets.

Corrections can be scary–there’s no doubt about that–but they shouldn’t motivate you to make drastic changes to your portfolio. One way to resist this temptation is to maintain a long-term investment horizon; that way, the ups-and-downs today appear rather insignificant when you consider the larger trends at hand.

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