Why is it so hard to go through a market correction?
In theory, most of us know that market corrections can be healthy and in fact are vital to sustaining a longer bull market. A correction is the natural mechanism of removing speculative excesses that develop during a long bull market. Gold prices can't and shouldn't indefinitely rise and bonds shouldn't provide double digit returns each year. To maintain long-term sustainable returns that significantly outpace inflation that markets have historically provided, speculative excesses must have a correction. Timing of when those corrections occur is anyone’s guess, but if they go too far without correcting, it can lead to more painful recessions like we experienced in 2008. There was an excess borrowing and speculative investments that went too far for too long. So shouldn't we be happy when we see modest corrections throughout a market rise? Isn't it actually helping avoid a larger problem down the road?
If this is true, then why is it so hard to handle the emotions of a correction as an investor? There are many reasons, but to state a few, none of us like to see our money go down. We have loss aversion. We tend to project a current market environment indefinitely into the future thus we often fear the worst and imagine the whole system imploding. We also naturally remember the last high point our portfolio reached and often forget where we started. If you invested $500,000 and the portfolio goes to $750,000 and then retraces to $650,000 in a correction, most feel they lost money, and they are just riding the market up and down. In reality they have still made $150,000. Most of us, behaviorally, would prefer to see our account balances grow each statement, but to earn higher long-term rates of return than what fixed returns can provide, disciplined investors have learned to become comfortable with the ups and downs. As we inevitably will face many corrections in the future, let us all be aware of our natural tendencies and behavior that can prevent us from making sound decisions with our money. The corrections are usually what allow for another stretch of growth pushing portfolio values and your wealth to new highs in a healthy and sustainable fashion.