What is a market correction?

A market correction is defined as a 10% drawdown from a previous market high.

While it may sound like a significant number, these events occur far more frequently than most investors believe. Indeed, they come around as often as your birthday. Over the last few decades, the average annual decline is 14%, with about three in four of these years still ending with a positive return.

Every five years (on average), we can expect a decline of about one-third, as we experienced in 2020. We know that the stock market does not move in a straight line, but rather fluctuates around a generally upward trend. We call this “volatility”.

Unfortunately, we cannot consistently predict ahead of time when these fluctuations will occur or when they will reverse. To be a successful long term investor is to accept the above with humility.

When a threat appears, it’s natural to want to run away. It’s how we’re wired. However, a market decline is not a lion. It’s a (mostly) harmless phenomenon that can only harm you if you react the wrong way.

Market declines will happen consistently over the course of your life, and your mindset when they occur is a choice that will determine your financial future. We recommend that you confront them with confidence rather than fear, mindful of the opportunities they provide.

Importantly, you have the luxury of being a long-term player in a system where everyone’s playing a different game. Contrary to the day-trader, what happens in the next 30 days is unimportant to your 30-year plans. If you’re in it for the long run, the odds are stacked in your favour. You’re guaranteed to win.

We know that stock markets provide positive returns about three in every four years. The negative year earns you the other three. It’s the price of admission for profiting from the collective ingenuity of the hundreds of companies working for you while you sleep. We encourage you to see the temporary declines are the reason for the stock market’s permanent returns. You can’t have one without the other.

The stock market is a device for transferring money from the impatient to the patient. As you exercise the patience you’ll need to repeat many times in the future, be encouraged that you are busy earning future returns. If you’re still saving, declines are your best friend, allowing you to buy more units of shares at knockdown prices.

Success in life requires the practice of rationality under uncertainty, and to be successful long term investors, we must decide to act on a plan rather than react to market movements. We are here for you as we continue to work on your plan together.

While we don’t know where the market will be in 6 months, we’re pretty confident where it will be in 10 years: much higher. Time is the enemy of market declines, and we’ve got plenty of it.

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