I’m Relieved by the Market Correction as I Near Retirement—Is That Wrong?
When the stock market reached correction territory earlier in March, defined by a drop of at least 10% but less than 20% off a recent high, a lot of investors got nervous. It’s disheartening, at the very least, to…
This post may contain links from our sponsors and affiliates, and Flywheel Publishing may receive compensation for actions taken through them.
When the stock market reached correction territory earlier in March, defined by a drop of at least 10% but less than 20% off a recent high, a lot of investors got nervous. It’s disheartening, at the very least, to see the value of your portfolio plummet overnight. And it’s natural to be concerned about the impact of a correction on your long-term plans.
In this Reddit post, though, we have someone who’s nearing retirement and is actually relieved that the stock market underwent a correction. And it’s easy to see where they’re coming from.
Why a correction isn’t all bad
Stock market corrections often follow a period of rapid growth, during which times a lot of stocks can become overvalued on an individual basis. And sometimes, a correction can help stave off a major downturn.
As the poster above writes, “The bigger a bubble gets, the worse the crash, so I’m a bit relieved.” And that line of thinking makes sense.
Also, stock market corrections can serve as an opportunity to buy stocks when they’re on sale, so to speak. When a broad correction hits, stock values tend to fall on a whole — but that doesn’t necessarily mean that quality businesses are suddenly worth less overnight. So a correction could serve as a prime opportunity to load up on great stocks at a discount compared to recent prices.
How to protect yourself from a stock market correction
If you’re many years away from retirement, a stock market correction is not something that should concern you. In fact, you’ll probably experience your fair share of corrections throughout your investing career.
Rather, a stock market correction becomes more worrisome when retirement is right around the corner — unless you’ve prepared properly. In that case, it may not be a problem at all.
Once you’re a few years away from retirement, it’s a good idea to shift your portfolio into safer assets and move away from stocks. This doesn’t mean you should dump your stocks completely. Rather, the key is to scale back.
So let’s say you’re nearing retirement and half of your portfolio is in stocks with the remainder in bonds and cash. And then let’s say the market loses 10% of its value. In that case, you’re not automatically losing 10% of your total nest egg — because only half of your portfolio is in stocks to begin with.
And remember, you don’t technically lose money during a stock market correction unless you sell off assets when they’re down. So if a good chunk of your portfolio isn’t in stocks, you can use that portion for income if needed while allowing the stock portion to recover its lost value. Put another way, with the right asset allocation, even if the stock market crashes during your retirement, you may not end up losing a dime.
All of this underscores the importance of working with a financial advisor. A financial advisor can help you allocate your portfolio in an age-appropriate manner. An advisor can also help you diversify within each asset class in your portfolio for better protection against market events.
Contact [email protected] for any questions or corrections.
Maurie Backman has more than a decade of experience writing about financial topics, including retirement, investing, Social Security, and real estate. Her work has appeared on sites that include The Motley Fool, USA Today, U.S. News & World Report, and CNN Underscored.
