Please disable Ad Blocker before you can visit the website !!!
ads
View : 170 Click : 0

Why An Investor Should Not Sell On Corrections

by Abhishek   ·  October 22, 2015   ·  

No one likes to see the value of stocks in the portfolio going down, it’s painful. It is the reality that share price can’t go up always they have to go down also. When the market goes down to a certain limit we call it correction, when it goes down too much we call it bear market.

Do investors need to worry about correction ? Should they exit from their stocks on the possibility of correction? Let us try to understand what is better for an investor by going into the history

What is correction ?

Correction is the fall or retracement in the market from the highs. Any drop of 10% or more is called as correction. When the market falls 20% or more this correction becomes bear market.

How frequently does correction occur?

The historical data says correction occurs approximately every year. A drop of 10% from highs in a year is very common thing. History says, the average correction is a drop of 13.5% and it lasts less than two months. The average length of correction is 54 days.

How frequently does a correction turn into bear market?

Bear market is defined as a stock market decline of 20 percent or more. Most of the correction doesn’t officially becomes bear markets. Less than one of five correction turns into an official bear market. The chances of a correction turning into a bear market is not more than 20 percent. Bear market occur every three to five years.  In the last 114 years there has been 34 bear markets from 1900 to 2014.

Bear market: How long and how severe ?

The average bear market decline is 33 percent and more than one third of the bear markets  have suffered drops of over 40%. The average bear market lasts close to a year with almost all of them lasting anywhere between eight months and two years.  Below is the data of S&P 500

bear market length

What happens after Correction or Bear market ?

After every correction or bear market the bull run happens 100% of the time. Not 50 % of the time, not 75% of the time, not 99% of the time but 100 percent of the time bull run takes place. See the history market makes new high always no matters whatever is the reason of bear market. Whether it is world war, recession, inflation, bubble bursts or anything markets makes new high always.

peter-lynch

How quick does bear market turns ?

When bear market gives way to bull markets, and when they turn for real they tend to up move furiously. See the below data how much the market goes up in the next 12 months after bear market.

bear market reversal

Market always looks at tomorrow. It doesn’t cares much where the economy is today it only see where it can be in future.

Why you should not exit fearing correction

The statistics shows hardly 20% correction turn into bear market. Bear market turns within 8- 24 months period. The math is against selling, the evidence is against selling and the natural bias of the market is against selling.  Fear of loss comes most of the time when market drops 10% it doesn’t comes when it drops 5-7% we consider it as normal profit booking correction only. It is illogical to convert to cash when the market drops 10 percent, because chances are very high that you are exiting at the typical bottom only. There are 80% chances that you will screw your portfolio by exiting at 10% correction.  Market can fall but they will recover and you will continue to get the dividend at least by staying in.

The golden words of Peter Lynch on corrections

peter lynch on market correction

The data for Indian market is also similar. Below is the data of BSE Sensex from 1979

YearCloseChange in %
1979118.76
1980148.2525
1981227.7254
1982235.834
1983252.927
1984271.877
1985527.3694
1986524.45-1
1987442.17-16
1988666.2651
1989778.6417
19901048.2935
19911908.8582
19922615.3737
19933346.0628
19943926.917
19953110.49-21
19963085.2-1
19973658.9819
19983055.41-16
19995005.8264
20003972.12-21
20013262.33-18
20023377.284
20035838.9673
20046602.6913
20059397.9342
200613786.9147
200720286.9947
20089647.31-52
200917464.8181
201020509.0917
201115454.92-25
201219426.7126
201321170.689
201427499.4230
201527306.83-1

Source : BSE

There have been only four bear in the last 38 years and all recovery took place in 12 months.  To conclude if you can give two years you should never exit fearing corrections or bear market. The reward of patience will be very fruitful.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.