Bounce Back From a Market Correction With an Opportunity Fund
Summary: No one can predict the future but based on past events; a market correction is coming. You need to start preparing for a market correction with an opportunity fund.<br> No one can predict the market but we can try to understand the present and try to make the best decisions for the future.<br> What is a Market Correction?<br> A correction is a decline in the stock market of at least 10% from its 52 week high that stops an upward trend. Is a correction a crash? No, a crash is a loss of 10% in a single day. A correction happens over a longer span of time.<br> While no one can predict a correction, we can look to past events to <a href="https://www.fool.com/investing/2018/04/11/how-long-do-stock-market-corrections-last.aspx">anticipate</a> when the next one might be coming.<br> According to market analytics firm <a href="https://www.yardeni.com/pub/sp500corrbear.pdf" rel="noopener">Yardeni Research</a>, there have been 36 corrections in the S&P 500 since 1950 of at least 10%, or about one every two years.<br> What Causes a Correction?<br> You’ve heard the term “irrational exuberance” when it comes to the stock market.<br> It means that investor’s enthusiasm is driving up stock prices to levels that aren’t supported by fundamentals. The market goes up, and everyone jumps on the bandwagon hoping to get in on the profits.<br> <a href="http://wallstreetjackass.typepad.com/raptureready/2010/06/wall-street-cheat-sheet.html"></a><br> When the prices return to where they should be, a correction has occurred.<br> It’s Coming<br> We are in the second longest<a href="https://en.wikipedia.org/wiki/List_of_economic_expansions_in_the_United_States"> boom cycle</a> in the history of the US. In exactly 12 months we will be tied for the longest with that boom cycle ending in the <a href="https://www.listenmoneymatters.com/what-is-an-ipo/">dot-com bubble</a> in 2000. The low, slow burn of this recovery prevented things from overheating, and we avoided the fast boom-bust cycles that the economy has experienced in the past.<br> <br> But many economists are predicting a correction and it could much more than 10%, some think it might be as high as 30%. What do they see in the tea leaves that indicate this? A few factors including increasing credit loans, an increase in the U.S. fiscal deficit, doubts about touted infrastructure spending plans and what is shaping up to be a nasty trade war.<br> Other Indicators<br> There are some other signs pointing to an upcoming correction.<br> Shiller PE Ratio<br> Yale Professor Robert Shiller invented this ratio to measure the market’s valuation. Some believe it to be a more reliable indicator than the standard P/E ratio because it eliminates fluctuation of the ratio that is caused by the variation of profit margins during short-term debt cycles.<br> The Shiller P/E ratio is calculated using the annual earnings of the S&P companies for the past ten years. Past earnings are adjusted for inflation using CPI. Past earnings are adjusted to the current dollar. Average the adjusted values for E10. The Shiller P/E equals the ratio of the price of the S&P 500 index over E10.<br> The standard P/E uses the ratio of the S&P 500 index over the trailing 12-month earnings of the S&P 500 companies. In an up economy, the companies have high-profit margins and earnings. That makes the P/E ratio artificially low because of higher earnings. In a recession, profit margins and earnings are low. That makes the P/E ration higher.<br> How can we use this to make better investing decisions? The information can help us devise investment strategies at different market valuations. In an overvalued market (rational exuberance) as we have now, it’s best to sit back and wait. When the correction comes, you can buy while the prices are low.<br> What Ray Dalio Thinks<br> <a href="https://en.wikipedia."></a>
