How to Cope With a Prolonged Stock Market Correction

Earlier this year, stocks dipped into correction territory after two strong years of gains. A correction occurs when stock values drop at least 10% but less than 20% from a recent high. Once stock values plunge 20%, we enter into bear market territory.

The good news is that stock market corrections tend to be fairly short-lived. In fact, historically, it tends to take the stock market about four months to recover from a correction.

But what if we’re in for a more prolonged window of pain? Tensions overseas, economic woes, and lingering pandemic fears could all contribute to an extended period of lower stock values. Let’s also not forget that the prior two years saw massive stock market gains, so it may take time for stocks to return to pre-correction levels this time around.

Image source: Getty Images.

If you’re concerned that our current correction may last longer than most, there are some steps you can take to make it through. Here’s where to start.

1. Boost your emergency savings

The danger of a prolonged stock market correction is that the longer stock values stay down, the more likely it is that you’ll run into an unplanned expense before your portfolio recovers. But that’s only a problem if you need to tap your portfolio to scrounge up cash.

If you don’t want to land in a situation where you have to liquidate investments, work on filtering more money into your emergency fund. Your goal should be to have enough money in savings to cover three to six months of living costs.

2. Free up cash to invest with

Some investors want nothing more than to stay away from stocks when they’re down. But here’s the beauty of stock market corrections — they give you an opportunity to buy stocks on sale. So it pays to free up cash to give yourself that option.

How might you do that? Cutting back on spending is one option, as is picking up a side hustle. And if you’re expecting a tax refund to hit your bank account any day now, that’s more money you can invest with, as well.

3. Keep diversifying your portfolio

It’s important to maintain a diverse investment mix when the stock market is volatile. As you go about scooping up discount stocks, make sure to dabble in different sectors of the market.

Another option? Load up on broad market exchange-traded funds (ETFs), which allow you to own a whole bunch of different companies with a single investment. What’s also great about them is that they take a lot of the guesswork out of investing, so if you’re not sure you want to take on the risk of buying shares of a specific company, you can fall back on broad market ETFs instead.

Focus on the future

We don’t know how long this current stock market correction will last. Heck, we don’t even know if stocks will stay in correction territory or plunge into bear market territory.

But what we do know is that the stock market has a strong history of recovering from downturns in time. If you stay the course, you can ride out this tricky period and, ideally, come out wealthier on the other side.

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