Traders work on the floor of the New York Stock Exchange (NYSE) in New York City.
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Stock market corrections are common
First, there is some consolation for investors. Though they may feel painful, stock market corrections are fairly common.
There have been 27 market corrections since November 1974, including last week’s market move, according to Mark Riepe, head of the Schwab Center for Financial Research. That amounts to roughly one every two years or so, on average.
Most of them haven’t cascaded into something more sinister. Just six of those corrections became “bear markets” (in 1980, 1987, 2000, 2007, 2020 and 2022), according to Riepe. A bear market is a downturn of 20% or more.
Pullbacks can be ‘an incredible opportunity’
Investors often engage in catastrophic thinking when there’s a market pullback, believing the market may never recover and that they’ll lose all their hard-earned money, said Brad Klontz, a certified financial planner and behavioral finance expert.
In reality, pullbacks are a less-risky time to invest, relative to when stocks are hitting all-time highs and feel more “exciting,” said Klontz, managing principal of YMW Advisors in Boulder, Colorado, and a member of CNBC’s Advisor Council.
Investors are also buying stocks at a discount, known as “buying the dip.”
“It’s an incredible opportunity for you to be putting more money in,” Klontz said.
This is especially the case for young investors, who have decades for stock prices to recover and grow, Klontz said.
Investors in workplace plans like 401(k) plans unconsciously take advantage of stock selloffs via dollar-cost averaging. A piece of their paycheck goes into the market every pay cycle, regardless of what’s happening in the market, Klontz said.
Be mindful of stock/bond allocations
However, investors should think carefully before going on a stock-buying spree, said Christine Benz, director of personal finance and retirement planning for Morningstar.
They should generally avoid diverging from their stock/bond allocations calibrated in a well-laid financial plan, she said.
Of course, certain investors with cash on the sidelines may be able to take advantage of selloffs by investing in undervalued stocks, Benz said. U.S. large-cap stocks, for example, were selling at a roughly 5% discount relative to their fair market value as of Wednesday, according to Morningstar.
“I would let the asset-allocation target lead the way in determining whether that’s an appropriate strategy,” Benz said.
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