When Market Corrections Bring Massive Benefit

I have a strong hunch that most readers right now like stocks a lot less than they did a year ago at this time. 

How would we know that?

Look around at the record setting weeks of outflows, some of the lowest sentiment readings on record and how all news now appears to be bad.

Meanwhile, insiders (who are usually sellers at times like these) are keeping their stakes in place.

And it’s easy to understand when the last 12 weeks have brought us all back to where we were in the latter stages of 2017, erasing all those heady, good vibes related to that nasty old tax cut and the coming repatriation of trillions of US dollars stuck overseas.

How in the world we ever thought that was a positive is tough to conceive of right now, right? 

I’m kidding, of course, but this is almost exactly what we spoke about back when I was suggesting we pray for a correction. 

Many people fear corrections. And well they should if they don’t have a plan other than to react to them.

But if you’ve got a strategy and goals, and all those other things that seem to get skipped in the heat of these moments, corrections can bring massive benefits.

They are the garden from which the seeds of the next surge upward can grow.

By example, have a look at the blue surges below. They wouldn’t be possible without the orange setbacks beforehand.

Understanding this makes you less likely to react like the rest of the investor herd:

The chart above covers the S&P 500 for the last 80 or so years back to the Great Depression. 

What it shows is that bears and corrections (orange) are required, and that living through them patiently has been proven (repeatedly) to be the most effective route to higher returns over time.

It also reminds us how much more often the markets are bullish than bearish.

Still, the majority continue to flood into the camp of “waiting until it feels better” or “pausing until the market straightens out” or, my favourite, “I'll invest when the future is seems clearer.”

All of these translate into the same bad message: “I will only feel better about investing when my investments are more expensive to buy.”

And yes, it’s completely nuts and yet gets repeated every single time we see a correction.