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Worried About the Next Market Correction? Did You Notice the Last One?

By Matt Thalman – Feb 16, 2014 at 7:00PM

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Thinking about market corrections and why they don’t matter.

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

After the Dow Jones Industrial Average (^DJI -0.56%) rocketed 26.5% in 2013, most investors believed the good days were going to just keep on rolling when 2014 began. Even the TV pundits said that while 2014 may not be quite as good as 2013, the major indexes will still end the year higher than where they started.

I agree with the pundits, but I wonder how many investors paid attention to the "not quite as good as 2013" part and didn't expect January's 5.29% correction on the Dow. The S&P 500 and the Nasdaq also fell during the month, by 3.55% and 1.74%, respectively.

Since the end of January, all the indexes have rebounded: The Dow is up 2.9%, the S&P 3.14%, and the Nasdaq 3.41%. So now that January's correction appears to be over, what have we learned? And why do these declines matter?

First, we need to ready ourselves and have realistic expectations about what the markets may do at all times. No one was expecting a 5% pullback when the calendar flipped to 2014, even though historically, the Dow loses 5% of its value three times every year, 10% once a year, and 20% every three to four years. Investors always need to be ready for a pullback, if for no other reason than to be able to control their emotions and decision-making processes when the downturns come.

Second, now that share prices in general are moving higher again, ask yourself if you'll even remember this correction six months from now. You probably won't. When was the last time the Dow dropped more than 5%? Unless you sold in a panic, you probably don't remember, because it doesn't really matter.

The markets will always experience temporary dips. Sometimes it's just a 1% drop on a single trading day. Other times it's a huge correction, such as when the markets fell by more than 50% over the course of a year during the depths of the recession. In either case, the market always bounces back and eventually racks up new gains. That's what you need to remember. Don't try to time a bear or bull market -- just ride the waves and be confident that time is your friend.

Matt Thalman and The Motley Fool have no position in any of the stocks mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Stocks Mentioned

Dow Jones Industrial Average (Price Return) Stock Quote
Dow Jones Industrial Average (Price Return)
$34,395.01 (-0.56%) $-194.76

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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