Stock Market Correction – Why Investors Should Embrace Bear Markets

Stock Market Correction – Why Investors Should Embrace The Next Stock Market Correction – The benefits of stock market corrections for long term investors.

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I tend to think differently about a lot of subjects—the stock market is no exception. 

To put it bluntly, I can’t wait for the next stock market correction to happen! It might be the best chance I have to boost wealth and reach financial independence.

A stock market correction would be the perfect opportunity to average down on existing positions, and it would be a chance to obtain higher dividend yields on fallen stock prices.

If you maintain a long term view, and if you select companies that increase earnings, then it’s likely that stock prices will be higher in 10 years. Furthermore, quality businesses reward shareholders by increasing dividend payments yearly.

Of course, it’s not that simple, because there’s always the possibility that an industry could change. But if you have a long time frame before having to rely on investments for income, a stock market correction should be embraced. 

Stock Market Correction – Why Investors Should Embrace Bear Markets

Because Quality stocks will be on sale.

Most dividend investors have pre-selected lists of stocks they intend to acquire. After all, most dividend investors are part value investor too. 

When a stock market correction occurs, the best stocks to buy are the high quality names that are usually overpriced. 

For example, a stock market correction would be a tremendous opportunity to acquire Apple shares. It’s a high margin business, strong brand, and they maintain an overwhelmingly impressive balance sheet. They have accumulated an absurd amount of cash.

In the case of the RTC portfolio, there is a very large list of names that could potentially be bought during stock market corrections. 

In fact, this is the reason why fees have been higher this year—I buy on market dips, and I also include the cost of trades for non-dividend paying stocks.

Nevertheless, a market correction means all the best stocks are on sale. It’s like boxing day for stocks if you maintain a long term view.

Higher Dividend Yields.

Just like the great recession in 2008, a stock market correction may be one of the best wealth building opportunities of an investor’s career.

As most investors know, it’s been more difficult to find value in recent years. There are a lot of blue chip stocks that are immensely overvalued. Companies have high p/e multiples of over 25 times earnings, which is unusual for blue chip stocks.

If a complete market collapse of 40 to 50% happened, technically, the amount of dividend income in each income projection would double. I’d be able to add double the amount of dividend income per year.

Essentially, I’d be able to acquire quality stocks at attractive prices and turbocharge dividend income at the same time.

Timeframe—I don’t need to access the portfolio for more than 10 years.

This is where investing becomes more circumstantial. For example, a stock market correction that lasts a few years would be a great opportunity for myself. But it probably isn’t the most welcome situation for those who are near retirement. 

For someone that is closer to retirement, a correction is not something to wish for. Ideally, you wish for the market to continue rising 7-10% per year. On the other hand, you probably should have a sizeable chunk of your portfolio in bonds. It doesn’t have to be the end of the world if you’re properly diversified.

For RTC this is about creating an elite scheme to build wealth and blog full-time. It could take up to 18 years.

As such, it makes sense to wish for a stock market correction because the portfolio will have time to recover.

Stock Buybacks.

If the price of a stock falls at at time when a company has already committed to buying back shares, it’s extremely advantageous for shareholders.

To be honest, I didn’t understand the advantage of stock buybacks until I read Buffettolgy. However, I now understand that stock buybacks reduce the number of outstanding shares. Therefore earnings are divided up by less shares, and that means there is more earnings per share. 

Increasing the earnings per share through buybacks is beneficial for two reasons: There is more cash flow per share to pay and increase dividends, and more earnings per share will eventually impact the p/e multiple and push the stock price higher.

In short, a market correction benefits a large company that has already committed money to stock buybacks. The company could buy back their own stock at a discount and reduce the number of outstanding shares.

Although not all investors agree with financial engineering tactics to grow earnings per share, I still believe that it’s an effective way to increase earnings for shareholders.

The Next Stock Market Correction is when Dividend Stocks outperform.

Of course, not many stocks fair well in market corrections. However, dividend paying stocks tend to outperform the riskier sectors during bear markets.

Simply put, dividend payments help to offset the capital depreciation. 

If you don’t believe me because the RTC portfolio is not large enough yet, just listen to Kevin O’Leary’s thoughts on the recent market sell-off:

I favour ‘boring as hell’ dividend stocks in times like these

Concluding Thoughts

Based on my personal time frame for financial independence, it would be more beneficial for a stock market correction to happen sooner rather than later. 

One day down the road, though, this will be something that I probably won’t wish for. By that point in time, the challenge will focus on risk management and maximum income.

But I wrote this post to share the opposite perspective of the panic-driven content the media uses to generate attention. In my opinion, the media tends to paint the wrong picture from time to time. They tend to use fear to draw interest and to drive ratings, and that can cause panic for less experienced investors. Just look at the cannabis industry sell-off that has been happening over the last two days, even though it was legalized in Canada today (October 17, 2018). It’s probably a buying opportunity as well, to tell you the truth.

In reality, most investors would be better off not even looking at daily stock prices. It’s important to be cognizant of them to take advantage of market sell-offs. However, it’s likely better to take an analytical approach based on the fundamentals and earnings of the company. If the earnings are quality, the product is relevant, and the balance sheet is in good shape, the short term fluctuations really mean nothing. They don’t mean a damn thing!

Frankly, market sell-offs should be seen as a positive. The shares are released from weak hands, it creates buying opportunities, and it means that less posers own shares in a company they fail to understand.

In conclusion, there are many benefits from market corrections for long term investors. As such, it’s the opinion of the RTC Portfolio Manager that market corrections should be welcomed. Just like in any career, a reset is needed every once in a while to create forward movement. 

Investors: Would you welcome a market sell-off? Are there any more positives about a market correction? Are you a dividend investor that does not want a market crash to happen?

I am not a licensed investment or tax adviser. All opinions are my own. This post contains advertisements by Google Adsense. This post also contains internal links, affiliate links, links to external sites, and links to RTC social media accounts.

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