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As investors confront DeepSeek’s impact, here’s how to handle stock market corrections

Hard earned truth: Market declines can be an opportunity if you're playing the long game

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The most difficult part of investing can be summed up in two words; losing money. It’s painful and, depending on which study you look at, the feeling you experience is two to three times more painful than making money. Simply put, the fear of a market loss far outweighs the thrill of investment wins.

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As equity investors stare down the barrel of China’s surprise impact on U.S. technology stocks with its DeepSeek artificial intelligence model, now is a good time to look at how to handle inevitable market corrections in your long-term investing journey.

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Like it or not, stock market downturns are a part of everyday investing. And you have to be aware of both the good and bad times of stock markets to have even a chance at doing well with your own investment portfolio. That’s why understanding stock market corrections is crucial to getting good long-term investment results.

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Why? Because you can use market corrections to your advantage. Yes, it pays to stop worrying and love a stock market correction. A market correction — generally influenced by economic conditions, political events, natural disasters and tech disruptions — takes place when a stock market index, such as the S&P 500 or TSX Composite, drops by 10 per cent or more from its previous peak. When the decline reaches 20 per cent, it’s called a bear market. If that 20 per cent or more decline happens over a very short period, then it’s a stock market crash. Corrections are less severe than crashes but an investor will still feel their impact.

Over the past 80 years, there have been 24 stock market corrections with an average decline of just over 14 per cent, according to data by IG Private Management. Data from Clearnomics, a financial advisory firm, goes further and shows that it typically takes five months to reach the bottom of a correction. However, once the market starts to turn, it can recover quickly, with the average recovery time for a correction being just four months. For bear markets, the average duration to reach the bottom is about a year.

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While it’s not clockwork, it does give you some idea of how often to expect them. That’s important because selling investments when the stock market turns downward carries significant risks for your portfolio. But more importantly, you can miss several opportunities by selling too soon and missing future market rebounds and growth. That’s because the stock market has historically trended upward over the long term, and investors who stay invested during corrections avoid the risk of missing out on significant market gains — and profits — that often follow downturns.

It may sound counterintuitive but to increase your investment returns, you should take advantage of stock market corrections to buy quality stocks and other equities at lower prices. Research backs up this strategy.

According to a recent paper by Westwood Investments titled Investing Opportunities of 10 per cent corrections, adding money to investments during temporary downturns can significantly boost portfolio performance over time. The paper goes on to calculate a scenario looking at the 50 years between 1968 and 2018. If new investors had invested $1,000 monthly in the S&P 500, and then at the end of each month added an extra $1,000, at the end of each month after a 10 per cent or worse correction occurred, they would have made a hefty sum. Those 26 extra contributions of $1,000 each during scary market shocks grew an extra $500,000 in the account, which backs up the assertion that, “the payoff for being brave while others are fearful is considerable.”

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So how do you prepare? You can start by diversifying your portfolio. Spreading investments across different asset classes such as stocks, bonds, and commodities can help reduce risk and smooth out market volatility. A well-diversified portfolio is better positioned to withstand market corrections.

“I find a buy-and-hold portfolio with a base in asset allocation exchange traded funds (ETFs) all 60 per cent stocks to 40 per cent bonds, all globally diversified,” said DIY investor Jonathan Chevreau, author of a weekly blog at Financial Independence Hub, about his own investing philosophy. “This can go a long way to helping investors sleep at night during severe market corrections. As well, basic rules like never putting more than five per cent of your total portfolio in a single individual stock, or 10 per cent to 15 per cent in any one sector, can also calm the correction jitters.”

As well, you can evaluate your risk tolerance by considering your investment time horizon and financial goals. Keep an emergency fund in cash or cash equivalents to provide stability during volatile markets. Rebalance regularly by reviewing and adjusting your portfolio to maintain your target asset allocation. Stay informed but resist the urge to make impulsive decisions based on short-term market movements. You want to avoid panic selling that can trigger nasty tax consequences like capital gains taxes.

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“Manage your expectations,” says Janet Gray, an advice-only certified financial planner with Money Coaches Canada in Ottawa. “If you are invested for the long-term, then you have time for recovery. Resist rapid responses to market changes — they may seem appropriate in the moment but could cause ripple effects in other areas, like taxes and future cash flow.”

And finally, work on developing a long-term perspective. Find a good adviser who can ensure your investment strategy aligns with your goals and risk tolerance and meet at least once a year. If you implement some of these strategies, you can potentially capitalize on opportunities that arise during these periods of market volatility and your investments will stay on track for success.

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“Just as important as product selection for your portfolio is reminding yourself why you invest for the long term and that generally panic is not a strategy,” Chevreau said. “Markets go up two out of every three years on average, so in the long run stocks can be expected to rise. But temper greed by keeping things balanced.”

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