My wife and I are safe drivers. I can say this with confidence, because we haven’t been stopped for speeding since high school; we’ve only had one minor accident that involved backing into a car in our driveway (I won’t say which of us did that), and we never drive without insurance.
Simply put, we follow the rules of the road and respect other drivers who share the road with us. However, things can happen.
Last summer, we were driving to dinner on a Friday night for our date. We were on Indiana 37 in Noblesville, and a dump truck carrying gravel hit a bump and sent a large rock flying towards my truck. Before we knew it, my windshield was cracked.
The next morning, I called my insurance representative and explained the situation to him. He told me we had paid for full coverage so the repair would be covered by our insurance. He referred us to a windshield repair service, and my windshield was replaced the following week.
The moral of the story is that even though we are safe drivers, we pay for insurance in proactive response to what is beyond our control. A person’s approach to investing in the stock market can also be low-risk – like my conduct – but that doesn’t mean you’re completely immune to a market correction.
Market risk is the possibility that you will incur losses due to factors that affect the overall performance of investments in financial markets. We have already seen this play out in 2022.
Outside of a COVID crash and a whirlwind recovery in 2020, the stock market has seen above-average gains for several consecutive years. Long-time investors said this was unsustainable and a correction was inevitable, but despite their warnings, the market continued to rise.
Market corrections, on average, have happened every two years since the Great Depression. Corrections are a healthy event that bring prices back to their most reasonable levels. Adam Harter, chief investment officer of the Financial Enhancement Group, compares market corrections to a wildfire: “Just as a wildfire is needed to clear undergrowth and debris to allow sunlight and nutrients to achieve new growth, periods of market weakness are often necessary. to prepare for future growth.
This is a rational long-term view that will serve any investor well. The problem is that when the correction occurs, you feel like you are in the middle of a raging forest fire that will never end. Add to that geopolitical turmoil and rising inflation, and you have a recipe for fear-based, reactionary decision-making that almost never leads to good results.
Market corrections are inevitable. The best thing an investor can do is be proactive and stick to your original plan and process. Just as I paid for my auto insurance and drove cautiously for years without incident, you need to diversify your investments to limit the damage before the correction occurs. This strategy may make driving boring or reduce your year-to-year earnings, but you won’t regret it when the downside hits.