Intro

This week the S&P 500 dropped 18% from its all-time high set just 3 months ago in September. How low will it go? How long will this downswing last? Is now a good time to buy? In this article, I’m going to tell you exactly how I’m playing this market dip.

Market Corrections – A Brief History Lesson

The stock market as represented by the S&P 500 is in a correction but not yet in bear market territory. A correction is defined as a decline of over 10%. A bear market is a decline of over 20%.

According to this CNBC article, there have been 123 corrections and 32 bear markets from 1900 through 2013. So on average, corrections occur about once a year and bear markets happen about every 3.5 years.

The market recovers from a correction to its previous highs within an average of 10 months. An average bear market lasts 15 months with an average decline of 32 percent.

The last bear market was caused by the bursting of the housing bubble and lasted 15 months from October 2007 to March 2009. During this time the S&P 500 fell 57.7% from 1576.09 to 666.79 points. This was the Great Recession and the worst economic time in U.S. history since the Great Depression. In the Great Depression, the Dow Jones Industrial Average fell 90%. It took nearly 3 years to bottom out.

What Should I Do as an Investor?

The truth is that no one knows how low the market will go this time or how long it will take to recover. As investors, we need to focus on making the best decision with the information in front of us. We can’t be overly concerned with things out of our control.

Strategy in Corrections and Bear Markets

To be clear, the strategy I’m describing here is only for my individual stock accounts. These are accounts in which over 50% of my investments are in individual stocks. I have a different strategy for mutual fund accounts.

When stocks are at all-time hights, I aim to have 25% of my portfolio in cash equivalents. For every 10% drop in the market, I use up 5% to purchase high-quality stocks at a discount. With this method I’d be all-in if the market dropped 50% like it did in 2009.

summary

The stock market is down about 18% from its all-time highs. I see this as an investment opportunity for long-term investors. I am buying stocks on the way down.

Disclosure

I wrote this article myself and it expresses my own opinions. I’m not receiving compensation for it (other than from Wolves Of Investing), and I have no business relationship with any company whose stock is mentioned in this article.