3 Valuable Lessons You Can Learn During Stock Market Corrections

A Stock market correction is typically defined by a 10% to 20% decline in major indices, such as the S&P500, Nasdaq CompoundWhere Dow Jones Industrial Average (DJIA). While not as dramatic a drop as stock market crashes, corrections can still wipe out a decent amount of portfolio value. Stock market corrections can make some people a little nervous when they see their portfolio, but this shouldn’t be a cause for panic. In fact, there are valuable lessons to be learned during stock market corrections. Here are three.

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1. They are inevitable

I hate to be the bearer of bad news, but unfortunately stock market corrections are inevitable. If you’re considering investing in stocks, you might as well be comfortable with corrections, as they happen relatively frequently – about once every two years. In the S&P500corrections of more than 10% occurred 10 times between 2002 and 2021.

The one thing you want to avoid doing when corrections occur is overreacting and panicking. If you’re a long-term investor investing in big companies, short-term dips shouldn’t be too much of a concern. Understanding that market corrections come with the territory can help you avoid stress when they occur and focus on how you can use them to your advantage.

2. Dividend Aristocrats can help hedge against market corrections

Dividend Aristocrats are companies that have increased their annual dividend distribution for at least 25 consecutive years. Being able to not only maintain your dividend, but also increase it over a long period of time shows that your business has been able to continue operating despite tough economic times. Any business that has survived the past two decades has been through the tech bubble crash (2000), the Great Recession (2008 to 2009), and the onset of the COVID-19 pandemic (2020).

Although the value of your investments may decline on paper during stock market corrections, owning Dividend Aristocrats ensures that you are still making money despite the stock price swing. And if you want an extra sense of security, you can check out Dividend Kingsthat have increased their dividends for at least 50 consecutive years.

3. Use fixes to reduce your average cost base

Your cost basis is the average price you paid for shares of a particular company or fund, and it determines the profit you make when you eventually sell the shares. Suppose you buy 10 shares of a company at $200, 10 shares at $180 and 10 shares at $150. In this scenario, your cost base would be slightly higher than $176:

  • 10 shares at $200 = $2,000
  • 10 shares at $180 = $1,800
  • 10 shares at $150 = $1,500
  • $5,300 divided by 30 shares = $176.67

If you eventually sell those 30 shares for $250, you’ll pocket just over $73 in profit per share. When stock market corrections occur and stock prices start to fall, instead of panicking, you may see it as a chance to buy some of your favorite investments at a “cut rate”. If you were willing to invest in a company or fund at $200 per share, you should be willing to invest in it at $150.

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