For investors who have been around the block a time or two, stock market corrections are a fact of life. The broader market mounts a pullback of between 10% and 20% every 16 months, on average, before ascending to new heights. A bear market that results in a decline of 20% or more happens less frequently (once every seven years or so).
On this clip from Motley Fool Live recorded on Feb. 12, "The Wrap" host Jason Hall and Fool.com contributor Danny Vena discuss why investors with the proper time horizon shouldn't fear a downturn.
Jason Hall: Danny Vena, I think this is a good one for you to talk about here. Chichi's question: "Is the never-ending hot streak make anyone else nervous?" The music always stops, right?
Danny Vena: I was actually looking at this question, thinking maybe I should volunteer for this one. In fact that you brought it up, great minds think alike.
I'll tell you that right now that it does not make me nervous. But the reason it doesn't make me nervous is because I have a long-term investing time horizon.
So stocks might be growing out of control, we might be getting high valuations. We might be due for a correction sometime soon. We might get a 10%, we might get a 20%. But the fact of the matter is that that is just a normal part of investing. It happens. Those 10% corrections happen almost every year like clockwork. So it's not something that concerns me because eventually, you're going to have reversion to the mean, and the stocks that have run a little bit ahead of themselves are going to pull back a little.
But over the long term, the stock market is going to grow more over the long term. I'll let Jason finish this thought with one of his favorite quotes, but let me just say that this is not a problem. If you have money in the stock market that you need some time in the next couple or three years, then it might be a problem. But as long as you have an emergency fund set aside, you're putting money in the market that you don't need in the next 3 to 5 years, just ride out these little dips when they happen because over the long term, you will be glad you did.
Jason Hall: As Peter Lynch has said, "More money has been lost by people waiting for the next downturn than all of the market's downturns in history have generated." As David Gardner says, "The market goes up two thirds of the time." Time in the market is our hedge. As Danny said, "Manage your exposure to your financial needs." If short-term volatility risks your ability to meet your needs, pay your bills, then you have money in the market that shouldn't be in the market. Again, it's short-term volatility. That short-term volatility is what drives your long-term gains. Danny, thank you, sir. I appreciate that.