Dealing with Your Fears About a Stock Market Correction and Downturn
Especially if you are not an older investor and you are regularly investing new savings into stocks, such as through a 401(K) plan or similar vehicle, falling stock prices could be a good thing. That's right - declining stock prices, especially in the shorter-term could be good news for your investing.
Think about it, when you buy just about everything else, don't you like sales and buy more of your favorite things when they are less costly? Famed investor Warren Buffett wrote about this in his 1997 "Chairman's Letter":
"A short quiz: If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.
But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the "hamburgers" they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices."
Now, if you're in retirement or close to retiring and are saving and investing little to no new money, this argument doesn't work and make sense. That said, if stock prices fall significantly, you might consider bumping up your stock allocation at least to the level you had desired before the decline occurred.
Of course, if stock prices fall over the long-term (decades) and stay depressed, that would be bad. But a decline in the next year, or two or three could be "good" for you.