The Next Stock Market Correction Is Coming To Dividend Stocks

I am asked daily about the timing and potential for the next stock market correction or “crash.” While I may not be as smart (or as marketing savvy, truth be told) to accurately predict the next stock market downturn, I do have a plan to prepare for the next time U.S. stocks fall in value.

I don’t think there will be a stock market crash in 2021. From my reading, the forces that will push the stock market higher are greater than those that would cause a decline. But I could very well be wrong.

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It is important to understand that not every stock market downturn is a crash. Technically speaking, a market decline would be classified as either a correction or a bear market. If the market drops (as measured by the broad stock market indexes) by 10% to 20%, the decline would be called a correction. It becomes a bear market when the drop exceeds 20%. You don’t need a bear market to feel very uncomfortable about a stock market correction. Consider that a 15% decline turns a $100,000 account into $85,000. No one would like to see that on their brokerage statement.

As to timing, an actual bear market happens on average about once per decade. The market experienced a sharp bear market in early 2020, but with a quick recovery. Corrections come more often, with a drop of more than 10% occurring about every other year. However, it is not uncommon to see a correction every year for a span of two to three years consecutively.

The averages indicate we may very well experience a stock market correction between now and the end of 2022.

My investment strategy focuses on building a dividend income stream. Investing with this approach turns market downturns into something from which to benefit rather than an event to fear.

For the next correction, I want to have some dry powder. However, because I don’t know the timing of that correction, I also don’t want to have a large chunk of money in cash, earning zero percent.

Instead of selling a bunch of stocks and hoping for a correction (how much lousy karma is that?), I have a moderate amount of money in a safe but interest-paying investment, and I add a small amount of money to that investment every month. The longer it takes for the next downturn to arrive, the more “dry powder” I will have to put to work. I don’t have to sell any investments now, which would cut into my dividend income stream.

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Disclaimer: The information contained in this article is neither an offer nor a recommendation to buy or sell any security, options on equities, or cryptocurrency. Investors Alley Corp. and its ...

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