How to Thrive After a Market Correction

By  //  June 29, 2021

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Ever since the coronavirus pandemic began to take hold across the globe, we’ve seen a host of international stock markets fluctuate between soaring highs and plunging lows.

The current market continues to see expansive prices highs in the US and similarly developed economies, thanks to the prospect of sustained global growth through 2021 and the fact that sentiment is close to being overbought.

However, this could hint that a market correction is just around the corner, but how can you prepare for this to ensure that you come out on top?

What is a Correction?

The term “correction” is surprisingly specific, referring to a decline of 10% of greater in the  price of a security, asset or a financial market.

From a technical perspective, this differs from a market crash in terms of the length of time taken for the decline to occur, as corrections can last anywhere from days to months and even longer (whereas crashes may occur over a period of hours).

History has seen a large number of corrections, with this providing an insightful guide into which stocks tend to rebound better and the practical steps that investors can take to thrive during such a period (we’ll touch more on this a little later in the piece).

More specifically, we’ve seen declines of between 10% and 20% occur at an average of every two years since 1932, according to data from InvesTech.

This offers a fascinating insight into the frequency and relatively cyclical nature of market corrections, while it also hints that another correction may be just around the corner.

A correction may certainly be incoming in the tech market, with flagship indexes like the Nasdaq 100 now up around 5,000 points and enjoying the fruits of an outstanding seven-year run during which time it has tripled in value.

This concern is also underpinned by the fact that tech stock prices continue to appreciate at a disproportionate rate to earnings, creating a clearly-defined bubble that’s likely to burst at some point in the near-term.

How to Thrive Following a Correction

There are several steps that you can take to help you in the wake of a correction, including creating a list of the stocks that you’d like to acquire at lower prices.

A pending correction should definitely encourage you to reshuffle your equities, as you identify shares that offer increased value in the wake of a correction and are likely to enjoy renewed growth in the longer-term.

You can use sites like Oanda to review real-time prices and historical trends, while this web trading platform also offers access to fundamental and technical analytical tools.

It’s also important that you don’t miss a stealth correction, as while broad measures such as the S&P 500 have continued to achieve new highs of late, a closer look at the market revealed that some sectors are floundering while others have already begun to recover.

Remember, you can buy beaten up stocks for less following a correction, while also selling overpriced equities for a profit prior to the market rebalancing itself.