If you’re peeking at your 401(k) after the recent stock market plunge, you’re not alone.
The S&P 500 index ended last week down more than 10% from its July high, putting the stock index in correction territory, a troubling milestone for millions of Americans who invest in one of the many mutual funds that use the index as a benchmark. standard, which reflects its performance.
The index, which includes 500 of the leading publicly traded companies in the United States, closed at 4,117.37 on Friday, down 10.3% from its last peak on July 31. The tech-heavy Nasdaq Composite, which entered a correction earlier in the week, closed at 12,643.01.
While a decline in the S&P 500 may make people worry about the performance of their 401(k), market experts say investors should keep in mind that declines are often short-lived.
“Although the past three months have not been pleasant for investors, it is important to remember that corrections are normal and happen often,” he said. Ryan Detrick, chief market strategist at financial services firm Carson Group.
What is the correction zone?
Corrections occur when the market experiences a decline of at least 10% from its recent peak, and are a sign that investors are skeptical about what lies ahead for stocks.
It is riskier than a pullback (usually a short-term decline of less than 10%) but it is not a complete bear market (a decline of 20% or more, which can lead to significant losses for investors).
Corrections occur every two years, on average, including during the 2009-2020 bull run.
Why is the stock market falling?
This decline comes as Treasury bond yields rise Make bonds more attractive to Investors are exiting stocks now that 10-year bonds recently topped 5% for the first time since 2007, amid various economic and geopolitical concerns such as rising tensions in the Middle East.
Although recent weakness has hurt stocks, investors should remember that between January and July, the S&P 500 hit an all-time high, Detrick said. Best performance in the first seven months It’s the start of a new year since 1997. This is “a kind of payback that wasn’t too surprising.”
Stock market movements:Earnings from major technology companies push the S&P 500 index lower.
What does the correction mean for me and my 401(k)?
Investors should remember how quickly the market tends to recover, according to Sam Stovall, chief investment strategist at investment research and analytics firm CFRA Research. He said declines take about a month and a half to return to breakeven, corrections take four months and bear markets with a decline of between 20% and 40% take 13 months.
Will the stock market recover?
“The phrase they should keep in mind is: ‘This too shall pass,’” he said. “If an investor doesn’t have 13 months, they probably don’t own shares.”
If investors take some type of action during a stock market decline, Stovall suggested they consider rebalancing their portfolio, buying high-quality stocks whose market prices have fallen, or tax-loss harvesting, which means selling stocks that are losing money. And using the loss to offset capital gains, or profits made from other property.
But his latest suggestion?
“Sit on your hands. Because the last thing you want to do is make an emotional decision. So you want to make sure you stop your emotions. From becoming your portfolio’s worst enemy.”
“Devoted student. Bacon advocate. Beer scholar. Troublemaker. Falls down a lot. Typical coffee enthusiast.”