Wealth Management Blog | WrapManager | Stock Market Corrections (2)

In our recent piece “Assessing the Probability of a Stock Market Correction,” we explained the nature of corrections and examined the probability of a stock market correction occurring this year. We concluded we would not be surprised if a stock market correction occurred sometime in the future. Is there something that investors could or should do to prepare for the possibility of a stock market correction?

Is There a Way to Avoid the Downside of a Market Correction?

Given that stock market corrections are normal in a healthy market but unpredictable and short in nature, it’s nearly impossible to time it correctly. However, one strategy to avoid locking-in the downside of a market correction would be to remain invested throughout the correction.

Below is a chart of the S&P 500 similar to the one we used in our “Assessing the Probability of a Stock Market Correction” piece, which illustrates the performance of the S&P 500¹ from December 31, 2010 – August 14, 2013 (Click on the chart for a larger version):

The run-up in stocks this year has been quite compelling so far. The S&P 500 is up +19.7% on the year as of August 51, and global stocks as measured by the MSCI World Index aren’t far behind at +14.34%.2 This strong performance has many investors asking: what is the probability of a stock market correction occurring sometime soon? Are there strategies to handle market corrections? Should I take some profits now as a short-term market timing strategy, so as to avoid any downside of a market correction? In a series of posts on stock market corrections, we’ll address these questions one at a time. What is the Probability of a Stock Market Correction Sometime Soon? Stock market corrections are normal occurrences in the markets. In fact, over the last 33 years the average intra-year decline for the S&P 500 is -14.7%.3 Using history as a guide offers some insight into a few examples of past stock market corrections (click on the chart for a larger version): [+] Read More