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In terms of how OFTEN the stock market drops, that really depends on how MUCH it drops….and the severity of each drop is broken down like this:
We first have what’s called a STOCK MARKET CORRECTION, which is defined as at least a 10% drop in price.
Now, normal volatility throughout the markets is EXTREMELY COMMON….in fact, since 1920, the SP500 has – on average – seen a 5% pullback 3 times per year. So, next time to see the markets down a like this for a week straight – it happens on a regular basis, and it’s nothing to be concerned with.
Market Corrections are also fairly common, too…on average, a 10% correction happens every 16 months, and throughout the last 20 years, a 10% drop has happened 11 times.
After that, we move on to the more SERIOUS category: THE BEAR MARKET, which is defined as a drop of AT LEAST 20%.
According to data, this TYPICALLY occurs every 7-10 years, and when it does, it hits hard. During a bear market, the stock market drops an average of 33.18%…and it falls over a period of 363 days. Now, it’s important to remember these are AVERAGES…and, just because it’s been this way in history, doesn’t mean it will always be like this, or the next drop will last an entire year.
And finally…we have the stock market COLLAPSE.
I’ll consider this a drop of OVER 40% throughout the ENTIRE market, not just one specific area…and, throughout the last 120 years…this has only happened 3 times. Once in 1929, again during the 1979s, and again in 2009. So, an actual STOCK MARKET COLLAPSE is rather uncommon…but, not impossible to happen again in our lifetime.
WHAT TO DO ABOUT THIS:
-ALWAYS keep a 3-6 month fund at all times.
I know I sound like a broken record when I say this nonstop, but it’s true – having 3-6 months worth of your expenses, saved up, in cash – at all times, is one of the easiest things you can do to make sure you’ll last through a stock market drop.
-DIVERSIFY your investments.
The more you spread out your money, the more you reduce your risk and volatility…and this is the approach I’ve taken.
-KEEP BUYING IN.
Study after study show that the best thing you can do is just STICK TO YOUR PLAN, KEEP BUYING, and HOLD.
-DON’T PANIC SELL.
The psychology that pushes you to sell because your investment is dropping…is going to be the same psychology that will hold you BACK when the market starts going up.
-KEEP A STEADY INCOME.
The biggest risk I see with stock market corrections is that, depending on the underlying cause – it could ALSO be associated with job loss, or a reduction in income – like we saw A LOT with the illness.
-KEEP MORE CASH
I’ll admit, statistically – this is NOT what you should be doing, and more often than not, investing your money all at once in the market will yield the best results – BUT, if you want to play it EXTRA safe…keeping MORE cash on the sidelines is a way to do that.
-If you NEED this money in 3-5 years – it’s probably not a good idea to invest in stocks.
A few years is not long enough to ensure that you’ll actually make money, so – the shorter your investment timeframe is – the less likely you should be invested in something that could drop in price. Ideally, you should view this as a 10-20 year long investment – or LONGER – and not less.
The reality is, IF you can do the above – you’re practically GUARANTEED TO MAKE MONEY over a 20-year timeframe, regardless of what the stock market does in the short term. I say this SO confidently, because – in the ENTIRE history of the stock market – a 20-year holding period HAS NEVER ONCE produced a negative result.
For business or one-on-one real estate investing/real estate agent consulting inquiries, you can reach me at GrahamStephanBusiness@gmail.com
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