This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Stock market corrections are a part of investing. The emotions of fear and greed rule Wall Street on a daily basis, and the tug of war between them creates a roller coaster of gains and losses that make the occasional correction inevitable.
Smart investors recognize that reality and prepare for it. If you have a solid end-to-end plan in place, a market correction might still be painful, but you could very well emerge in a better spot on the other side of one. With that in mind, here are three reasons to treat a market correction like a cup of burnt coffee.
No. 1: It's an unpleasant experience, and you're out some money
If you buy a cup of burnt coffee, the taste can be nasty, and you're out the money you spent. In addition, especially if you're on the run, there might not be much you can do about it except choke it down and move on with your life.
Similarly, when the stock market corrects, it can leave a dent in your wallet and a bad taste in your mouth. In addition, there's a good chance that once the correction takes place, there's little you can do aside from accept it and figure out what to do next.
The common thread is the need to accept the situation, and figure out what to do next. Just like you can't really go back in time and undo the coffee, you can't really go back in time to undo a market correction. Still, if you recognize the possibility of a market correction in advance, you can prepare yourself so that the long-term impact to your finances is not much worse than a bad cup of coffee.
The key is to recognize that money you need to spend within the next five years or so does not belong in stocks. With that long-term horizon, you give the market time to stage a recovery, and you give yourself a chance to adjust your spending should it appear that a recovery may take longer to happen.
No. 2: This, too, shall pass
One of the nicer things about burnt coffee is that the experience passes. Once it does, you can move on with your life, largely no worse off for the experience. Similarly, every market correction that we've had so far has been temporary, with the market ultimately coming back stronger. Unless there's a complete breakdown in society or a socialist economic takeover, there is every reason to believe that the trend of recoveries will continue.
Consider, for instance, the dot-com bust, when all sorts of high-flying internet-first companies completely vanished after the market collapsed. That didn't mark the end of the internet, but rather the emergence of a much stronger breed of businesses that learned from the mistakes and built upon the successes of their predecessors.
In a healthy market, that's exactly the sort of thing that market corrections enable. Indeed, one of the biggest problems our economy currently faces is that there's a slew of zombie companies out there, surviving only because of cheap debt. Those zombie companies are consuming resources and brainpower that could otherwise be used more productively. As painful as the near-term disruption might be, history shows that the eventual recovery makes the survivors and new entrants that much stronger.
No. 3: There could be some good to come of it after all
If there's an upside to burnt coffee, it's that it still tends to have about the same amount of caffeine as the unburnt variety. So if you're into coffee more for the pick-me-up than for the taste, even the burnt kind can serve that purpose.
Taking that perspective to the stock market, if there's an upside to a market correction, it's that corrections often open up some of the few opportunities to buy strong businesses at value-stock prices. This is because when fear is actively winning the market's battle of emotions, even great companies tend to see their share prices drop.
The lower the per-share price of a company, the more shares you can pick up for any given dollar amount invested. That can serve you well in any subsequent market recovery, as you can keep those shares, even if their prices do go back up. After all, fortunes aren't made in bull markets -- that's just when they get revealed. Value investors like Warren Buffett, who are able to buy strong companies at cheap prices during market corrections, show just how powerful that process can be.
Get yourself ready for the market's next correction
Like the occasional burnt cup of coffee, market corrections are inevitable. The better prepared you are for a correction, the easier it is for you to handle it when it happens. Make today the day you start preparing for the next correction, and you'll improve your chances of being able to make it through intact.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
