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Here’s what investors should know as stocks continue a wild ride

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At the New York Stock Exchange’s opening bell on January 25, 2022, traders work on the floor.

TIMOTHY A. CLARY – AFP | AFP | Getty Images

The stock market has taken a hit in January. It is the S&P 500Index, the widely-cited indicator of U.S. equity markets, reached “correction territory” for the first time in the aftermath of the market turmoil caused by the pandemic in March 2020.

How does it work?

Stocks that fall more than 10% from their recent peak are subject to a “correction”.

In a wild day of trading on Monday, the S&P 500 stock index — a basket of the country’s largest publicly traded companies — sustained heavy losses. The index was down by more than 10% from the high point on Jan.

After a brief rally late in the day, the index saw a modest gain but it was still in danger of losing ground.

But investors shouldn’t panic — the ups and downs are a regular feature of stocks, according to financial experts. Sellers who panic in response to carnage can often cause financial damage.

Stephanie Roth (senior markets economist at J.P. Morgan Private Bank) said that corrections can be seen “not very often.” But it’s not good every single time you get in one.

Frequency

The S&P 500 has experienced a correction in 21 of the last 41 years, according to J.P. Morgan Private Bank.

In two out of three correction years, however, U.S. stocks returned a positive annual income. That suggests staying invested over the long run pays off — though data suggests investors often sell during dips and miss those recoveries, according to J.P. Morgan.

Volatility is a key feature of stocks — a risk that generally rewards long-term investors.

“It’s ‘stay the course’ – the market goes up and down,” Dan Herron, a certified financial planner and founder of Elemental Wealth Advisors in San Luis Obispo, California, said of his typical advice to clients during stock gyrations.

Herron stated that it could be an opportunity to purchase more stocks for those who have the funds. Stocks are being sold at a discounted price after recent highs. After a 2021 year of high stock returns, investors may be adjusting their portfolios to reflect falling stocks.

Financial impact

Stock market swings that are large and positive, often occurring within days after the initial plunge can make a big difference in one’s return.

For example, a $10,000 investment in the S&P 500 would have yielded a roughly 9.2% average annual return from December 2001 to December 2021, according to J.P. Morgan Asset Management.

However, the return for those investors who sell and miss the best 10 days in a given period fell almost half to 5%; for those who didn’t miss the best 30 days it was close to 0%.

Recovery

Since 1945, investors have taken four months, on average, to recover from a pullback of 10% to 20% in the S&P 500, according to Guggenheim Investments.

It took 14 months to recover from a 20%-40% plunge, which was a far more rare event. Guggenheim estimates that only three drops below 40% have occurred, and recovery took 58 months.

The problem is that investors can’t predict how much pain they will feel and for how long.

Investors should consider the time horizon as well as the purpose of invested funds when deciding on what action to take, says CFP Ted Jenkin. He is also the cofounder and CEO at oXYGen Financial.

“The single most important thing” [in this situation]Jenkin stated that knowing your financial plan will help you make the right decisions. If you’re over 50 years old, the stock market is something you could do. You don’t have to worry about what will happen each week or day.

Jenkin stated that some investors might be investing in stocks to meet immediate needs such as funding college tuition or purchasing a home within the next few months.

Given their high risk, stocks are not an ideal location for short-term funds. He said that such investors could have to choose between keeping the funds in market for a recovery or risking more losses in short-term.

This is the game: Will you place a bet on black or red? Jenkin spoke.

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