Have you ever heard the term ‘stock market correction’? Unlike the stock market crash which defined as the instant decline across the stock market, the stock market correction happens when the market falls 10 from its 52-week high.
Mostly, great investors will welcome market correction. They usually anticipate the price pullbacks and give the market the chance to consolidate and going higher. In the last 40 years, each of the bull markets has had a correction.
Stock market correction versus crash
Within a correction, the 10 percent decline manifest over days, weeks, or even months. On the other hand, within a stock market crash, the same decline can happen in just a day.
Besides, only crashes that can lead to a bear market. A bear market is a condition when the market falls another 10 percent, which makes it have a 20 percent decline. That decline, moreover, can fall further.
What worst? That market crash can also lead to a recession. The stock market reflects investors’ confidence upon the possible earning of the company. Thus, it can indicate the economic health of a country.
Consequently, the market stock crash signals a significant loss of confidence within the economy. It reduces investors’ wealth which later motivates consumers to buy less.
The long term effect is companies will also lay off workers since they also produce fewer goods and services. The drop in demand getting worse since the workers also become more reluctant to purchase. That continuous declines create a recession.
Also read: Relation between Stock Market and Economic Cycle
How to protect yourself
The best way to protect yourself from both market crashes and corrections are by creating a diversified portfolio. A diversified portfolio means you hold a balance of mix various investments, like stocks, bonds, and also commodities.
The stocks will bring you profit during the market upswings, meanwhile, the bonds and commodities will protect you from market corrections and crashes.
Yet, you can adjust your asset allocation according to your financial goals. For instance, if you will not need a big sum of money for years, then, you can have a higher mix of stocks. In contrast, to give you more money next year, you can have more bonds.
If you overwhelmed by setting your asset allocation alone, you may consider working with a financial planner.
