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Should You Be Worried About the Upcoming Correction?

Matt Koppenheffer
August 27, 2009

Like death and taxes, a correction from the market's feverish run-up may be inevitable.

Some of the previously most-feared stocks in the market, like Bank of America (NYSE: BAC  ) , Citigroup (NYSE: C  ) , Fannie Mae (NYSE: FNM  ) , and Freddie Mac, have put up stellar gains from their March lows, but I hate to break it to you -- it ain't gonna go on forever.

I know, I know, you don't want to hear it and I sure don't want say it, but correction is almost surely lurking in the shadows of the huge recovery that the market has made since March. I can almost hear that haunting Jaws music, signaling that the question isn't "if," but "when" the market will peel back some of its gains.

A history of retreat
If we look back at historical examples of market recoveries, we can see just how surely correction seems to walk hand in hand with rebound. Here are examples from the two market crashes comparable to today:

Date of Bottom

Length of Rebound

Size of Rebound

Size of Correction

July 8, 1932

Two months



Oct. 4, 1974

23.5 months



Source: Yahoo! Finance. Dow index used for calculations.

Based on the magnitude of these past recoveries, we might be able to say that today's prices have more room to run, since the Dow hasn't even hit a 50% gain yet. But whether or not we see the market run further, it seems almost inevitable that a fairly sizable correction will slap the taste out of Mr. Market's mouth at some point.

When will it come? Past experience doesn't help us too much there since these big corrections came on very different schedules.

More important, though, is the question of how much we should fret about the coming correction. Here's a look at what the market did over the 10 years following the peaks of those post-meltdown rebounds:

Date of Rebound Peak

Returns Over Next 10 Years

Annualized 10-Year Performance

Sept. 7, 1932



Sept. 21, 1976



Source: Yahoo! Finance. Dow index used for calculations.

While it's nice to see that the returns are positive, this little bit of data is hardly encouraging. What it says to me is that if you're invested at the peak of a post-crash rebound, the best you can hope for over the next decade are adequate returns.

Well that's great, so what do we do?
There are certainly advantages to investing in a broad index of stocks -- heck, even Warren Buffett recommends that for most individual investors. But I assume that if you're bothering to read this, you're looking for more than adequate returns.

If that's the case, don't bother with the market as a whole; your best bet is to get down and dirty and find the best individual stock opportunities out there. Sure, all individual stocks move with the market to some extent, but finding the best opportunities can mean capturing significantly better performance than the rest of the market.

For instance, it's been very well publicized that the overall S&P index has been a pretty lousy performer over the past decade (for the record, it's down 25%). However, there are quite a number of stocks that have gone gangbusters over the past decade. Check out these multibaggers:


10-Year Price Change

Apple (Nasdaq: AAPL  )