Should Investors Be Afraid of Market Corrections?

Geopolitical crises and economic and climate shocks affect not only the lives of citizens but also financial markets. They are sensitive to news of both economic and political nature, so investors who are witnessing the growth of the value of their assets may encounter such a phenomenon as a market correction. Should you be afraid of it and try to predict in advance? Read the article to find out how you can not only minimize possible damage but also gain certain profit during this time.

How to Understand Market Correction in Simple Terms

Every person, even if they are not an investor, periodically encounters situations that are essentially equivalent to a market correction. You just call it something else, such as unforeseen circumstances, emergencies, etc. They are not drama or tragedy, but these events temporarily interfere with your long-term plans.

Typical Example

You are saving money to open your own business or purchase some expensive goods, for example, a car, equipment, piece of land, etc. Monthly growth of this amount brings you closer to achieving your goal. But suddenly, some unexpected needs may arise, for example, the breakdown of some important equipment and the need to replace it, renovations in the house, undergoing a medical examination, etc. In this case, you can:

• Take the necessary amount from what you have accumulated to achieve another goal, thereby pushing its realization further in time.
• Take out a micro-loan, such as a payday loan, by comparing the terms of different lenders and choosing the best ones on the Payday Depot platform.
• Ask for the required amount of money from relatives or friends.
• Essentially reduce your daily expenses to fit into your monthly budget.

As you can see, nothing critical happens, you are simply forced to adjust your expectations regarding the implementation of certain significant plans.

How to Determine That You Are Witnessing Market Correction

The same thing happens during a market correction. Prices for a certain asset are declining in case of a bullish market or rising in case of a bearish one, but this does not mean a change in trend. They will continue to grow or fall after a slight correction. Financial analysts say a market correction occurs when asset prices fall or rise by at least 10% but not by more than 20% in opposite to the current trend direction. It is this range of changing prices that tells you that the price decline or growth is not irreversible and does not signify a trend reversal. It is like a small obstacle that arises in the way of further movement in asset prices in a certain direction.

What to Do During a Market Correction?

The actions of investors largely depend on whether they were able to predict a market correction, or whether they are forced to quickly react to it:

• If you were expecting a market correction based on news analysis or technical analysis, then you can sell some of your assets at a higher price before it falls. The proceeds can be invested in other profitable assets that are currently undervalued.
• Also, if the indicators you rely on tell you that this is a market correction and not a trend change to a bear market, you can profitably buy assets the prices for which are currently falling but will soon continue to rise.

It would also be a good idea to prepare for possible market corrections by diversifying your assets, hedging, regularly rebalancing your portfolio, etc. In this case, you will not be afraid of a market correction but, on the contrary, will be able to make a solid profit from it.