Year to date, the broad-based S&P 500 (SNPINDEX: ^GSPC) has advanced 13%, while the growth-focused Nasdaq Composite (NASDAQINDEX: ^IXIC) has added 15%. The driving force behind those double-digit gains has been strong corporate earnings results.
However, stock market corrections (and even crashes) are inevitable. Near term, the market faces headwinds related to elevated energy prices and potential interest rate increases. And long term, the S&P 500 and Nasdaq Composite could decline for any number of reasons.
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Fortunately, history provides a clear blueprint regarding how investors should navigate the next stock market correction. Here are the important details.
Stock market corrections are inevitable, but the S&P 500 and Nasdaq Composite have always recovered
The S&P 500 is widely regarded as the best benchmark for the overall U.S. stock market because it includes about 80% of domestic equities by market value. Since 2010, the index has suffered 10 market corrections, two of which eventually became bear markets.
The Nasdaq Composite is regarded as the best gauge for growth stocks because the Nasdaq Exchange has more flexible listing rules and lower fees than the New York Stock Exchange, which makes it a more attractive destination for innovative technology companies. Since 2010, the index has suffered 14 market corrections, four of which became bear markets.
In short, stock market corrections were relatively common during the past 15 years. In all cases, the smartest move investors could have made would have been buying the dip. The S&P 500 and Nasdaq Composite have never failed to recoup their losses, meaning investors who put money into funds tracking those indexes during past corrections would be sitting on profit today.
Warren Buffett, whose value-oriented investment strategy helped build Berkshire Hathaway into one of the largest companies in the world, has often advocated for buying the dip. “The best chance to deploy capital is when things are going down,” he said during a CNBC interview in 2018. “Be greedy when others are fearful,” he wrote during the financial crisis in 2008.
The S&P 500 and Nasdaq Composite tend to deliver robust returns after entering correction territory
Since 2010, the S&P 500 has dropped into market correction territory about once every 18 months, while the Nasdaq Composite has dropped into correction territory about once every 13 months. Any attempt to avoid those periodic dips is likely to backfire because investors must be correct twice: They must know when to sell and when to buy again.
