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S&P 500

What investors should learn from stock market's sell-off and bounce

Matt Krantz
USA TODAY
Hopefully after a rough week, investors are wiser.

Stock market corrections make investors poorer. But they should also make them tougher and smarter. Learning from big sell-offs can pay off in the future.

What a sell-off it was. The Standard & Poor’s 500 entered into a correction this week and fell as much as 12.4% from the market’s high to the closing low on Tuesday.

It was the first time investors have been subjected to a correction since 2011. Investors watched as nearly $2 trillion in value was erased from the values of S&P 500 companies in just days.

Stocks are racing back — narrowing the losses from the high to 6.7%, but still leaving investors to wonder if the pain is over.

But one thing's for sure: Investors got a refresher course on lessons about investing in good times and bad, including:

•Don’t try to time the market. As if investors needed to hear this again, but the vicious decline and then sudden upswing was a resounding reminder of the perils of trying to get in and out of the market at just the right time. Investors who panicked and sold on Tuesday locked in a 12.4% decline from the market high, which was at least half repaired in just two days. And that’s not to mention the head-fake rally on Tuesday that chewed up investors who jumped in too early.

•Don’t load up with hot, trendy stocks. The broad stock market’s pain is tough enough to endure, but why make the situation worse? Apple, which is consistently a top holding by individual investors, was the biggest wealth destroyer in dollar terms during the market’s implosion, falling 21% from the market’s high to the low. Investors who have loaded up on this one stock have magnified the effects of the market’s meltdown, which was already bad enough.

•Don’t overreact. If you have a diversified portfolio, you don’t need to fret over the market’s day-to-day swings. Most market declines don’t turn out to be much more than a blip on a long-term chart headed upward along with companies’ earnings and cash flow. Most corrections never turn into full-blown bear markets — and corrections pass soon enough.

The past 19 corrections on the S&P 500 lasted only 138 days on average, but more important, investors recovered their losses in just 110 days. If you invest for the long-term — these events are typically just an uncomfortable couple of months. A little pain is a small price to pay to enjoy the long-term money-generating power of the market.

“History suggests the S&P 500 will rebound. We agree,” according to a Barclay’s Capital report to clients this week.

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