For Wall Street and investors, 2020 will fall as a year that will not soon be forgotten. The disease of coronavirus 2019 (COVID-19) completely undone social and business habits, led to a record-breaking peak higher in the US unemployment level, and sent the CBOE Volatility Index after healing time.
For some added context at this last point, previous bearer purchases that reached at least 30% took an average of 11 months to reach that mark. At the time of the crash, the coronavirus was 34% off the benchmark S&P 500 (SNPINDEX: ^ SPX) in just 33 calendar days (less than five weeks), and the icon shipped Dow Jones industrial average (DJINDICES: ^ DJI) to bear market territory after just 16 trading sessions (a little over three weeks).
It was a crazy and uncomfortable time for investors. And now, 175 calendar days later, it’s old history.
Image Source: Getty Images.
The stock market is now 38 for 38 since 1950
Since 1950, corrections have occurred on stock markets with greater frequency than you might realize. According to data provided by Wall Street analytics firm Yardeni Research, there have been 38 official correction of shares in the S&P 500 over the past 70 years. By “official” correction, I refer to declines of at least 10% from a recent high , without rounding. This works out after a correction, averaging every 1.84 years.
One of the few things we know about stock correction is that they are, quite simply, extremely unpredictable. We will never know when one will occur in advance, nor will we know how long a correction will take or how steep the decline may be. Often an X-factor comes out of the left field and drives the stock market lower (e.g. COVID-19), instead of the one catalyst that everyone seems to be grinding on (the US-China trade war).
This inability to see or know in the future how companies, central banks, or consumers will respond to external pressures is precisely why no “certain things” are considered when it comes to investing. Then again, this statement is not entirely accurate.
You see, there is one guarantee of the stock that has been proven over and over again over the past seven decades. With the S&P 500 briefly aggravating its February 19 closing of 3,386 in the trading session on Wednesday, August 12, the stock market officially put the coronavirus correction in the rearview mirror.
In other words, the stock market is now a perfect 38-for-38 since 1950 while erasing all of its adverse corrections. Ultimately, optimists always come forward.
Image Source: Getty Images.
The not-so-secret formula for successful investing
Again, we cannot predict how long it will take for after movements in indexes to be removed. However, we know as a virtual fact that over time indices and many of their underlying components increase in value as board income grows. Thus, the long-term investors who take advantage of the opportunity to buy during periods of weakness, and who are not followed out of their positions by what are often very short-term volatility, are conveniently rewarded.
Thus, the first rule of navigating any stock correction is to stay the course and trust in your investment thesis. If your dissertation changes, selling is always an option. But in many cases, I have found that short-term volatility rarely changes a company’s growth.
When making corrections in stock markets, it is also never a bad idea to consider buying dividend shares. Companies that pay a dividend are almost always profitable, and they typically have time-tested business models that provide excellent growth transparency. The payouts you receive can help hedge in part against disadvantage in the long run, or they can be reinvested for compound wealth.
Best of all, dividend stocks have gone round and round over their non-dividend-paying peers. Between 1972 and 2012 was a Bank of America/ Merrill Lynch report found that publicly traded companies that initiate and grow their payouts produced an average annual return of 9.5%. This compares with a meager 1.6% average annual return for non-dividend stocks over this same 40-year stretch.
Image Source: Getty Images.
While this may sound like “buy dividend stock”, it does not overlook growth stocks. While there is no question that companies with higher valuation premiums and / or sustained losses may experience a broad volatility swing in a correction of equities as a bearer, the share price upside for growth stocks may be enormous in the long run.
During marketing, the Federal Reserve usually lowers interest rates to boost lending. This has a positive impact on growth-oriented businesses through lower borrowing costs and stimulating expansion.
Furthermore, innovative companies with sustainable competitive advantages would obviously have to perform over time, making them the perfect buy candidates in any major stock correction.
Almost the only thing you do not want to do when the stock market falls is to buy shares on margin. Although the use of margin is unavoidable in certain situations (for example, the short sale of a stock), the unpredictability of short-term stock movements makes use of margin extremely risky, and may ultimately increase your loss.
Long story short, the next time the stock market corrects, be a confident stock buyer, because in the long run investors will make a perfect 1,000 batch!
