Stock Market Corrections Are Healthy

As an investor in the stock market you more than likely have invested in hopes that the stock market will appreciate over time. As the market moves higher, your individual investment portfolio will do just the same. It can be a common thought for investors to continuously cheer for an up period in stocks all the time, but you would be wise to understand that stock market corrections are healthy in the long run.

What exactly is a stock market correction? A correction in the stock market is generally defined as a price reduction of at least 10%. Corrections typically occur over a relatively short period of time, but that can vary from time to time. During this time frame the pullback is usually wide in its breadth, meaning it affects just about every industry.

As a finance professional and someone who has money in the stock market myself, I can understand those of you who might wonder why we should hope for a correction in the stock market from time to time. Watching your portfolio value fall isn't fun, but it is important you keep a long-term perspective.

The single biggest reason that a correction is good for the market is greed is the number one evil of investing. When investors become too greedy and start assuming the market will continually jump higher, that is a very dangerous stock market. We saw in the technology bubble of the late 1990's just how unhealthy that can be for a market. Without corrections, investors often lose sight of the fundamentals of a business and simply start trading to make a quick and easy buck. The stock market isn't that easy, and if you start thinking it is, you're destined for failure in the market.

If you are a long-term investor, as I believe the vast majority of investors should be, you should see that a correction creates lower prices and buying opportunities. If a particular stock that you have been wishing to put money into moves lower by 15 percent, you clearly have a much better entry point. Consider a stock market correction during a bull market just like a discount at the grocery store. Stocks can be on sale from time to time, and it is up to you to find the bargains.

The next time you see the stock market move lower for several days after a nice up trend don't panic, rather remember that corrections are vital for the health of the market.