Really, what are the odds?
Every time the market pulls back, even just a little bit, people get worried a market crash is imminent. Well, there is a chance, albeit a small one and my friend,The Investment Scientist (aka Michael Zhuang) has the statistics to prove it. He wrote a great article about a doctor client who was getting nervous about the markets because his colleagues were pulling money out of stocks. There logic was that the market was hitting new highs recently and therefore was due for a crash. Well believe it or not, new highs do not foretell a market crash. As Micheal put it, "There is simply no certainty in the stock market." And here are the actual odds of a market correction:
Michael has another study which shows that despite breaking new highs the odds of a correction do not increase substantially. Therefore, "...the odds of the market dropping over 20% in the next twelve months are still about one in five; the odds of the market dropping over 30% in the next twelve months are still about one in ten."
So what do we do if a market correction does happen? Well, as long as you've done your homework ahead of time your financial plan will guide you through it. This is also why a Buy & Hold Strategy is not a good investment strategy for anyone. Or try this Strategy to Avoid the Next Bear Market.
It might be hard to do but you should look at market corrections as an opportunity. It just means stocks are cheaper and with the proper rebalancing strategy you will come out of any bear market stronger then before.
You can read Michael's full article here.
Another good read on this subject - Is the Stock Market Overvalued?
What are your friends and colleagues saying about the market?