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Quick Thought Of The Week: Correction

Brian-Hillegas-Flickr

The US market is in correction. The Dow Jones Industrial Index has fallen 10% from its recent high, which is the official definition of a correction. It only goes to show that US shares are not as immune from price falls as some in The White House would have us believe.

American shares can be as prone to price drops as those loftily-priced shares on the Shanghai Stock Exchange. The Singapore market is already in the correction zone.

That got me thinking. Why does the word “correction” drive fear into the hearts of some investors and traders? I suspect it has something to do with the very word itself…

…. I remember from my school days that the fewer corrections I had in my homework, the better it was. It meant that I had completed the tasks that the school teacher had set without errors. But a sea of red ink with lots of corrections was bad.

Perfection fixation

Perhaps it is that fixation we have for perfection that gets some of us all flustered when we hear about corrections. We believe that it somehow means that we have not been vigilant enough with our money.

But here’s the thing: stock-market corrections happen regularly. Roughly about once a year – but they don’t occur so regularly that we can set our clocks by it. In fact, everything could be going swimmingly in the market one day, then suddenly – bam – a correction happens.

Sometimes a stock-market correction can turn into a full-blown bear market. That is when the stock market falls by 20%. But that generally happens if there are signs of a severe slowdown in the economy. That possibility seems remote at best….

…. But it doesn’t mean that corrections will (un)correct themselves quickly. So, be patient. Focus on the long term and take advantage of lower prices to add more shares to your portfolios.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.