The 2022 Market Correction: How It’s Different And What You Can Do To Protect Your Retirement

It’s the question everyone wants answered: is this market correction the same as the ones we’ve seen in the past, or is it worse this time?

There’s a tendency to believe that anytime the market corrects or there’s a bear market, that it’s going to be different this time. Here’s what I think: the reasons behind the correction are always unique, but our reactions shouldn’t be. Here’s what I mean:

How is it different?

Let’s look at some of the prior market corrections. There was Y2K, when everyone thought that global industries would be brought down due to computers not being able to distinguish the year 2000 from 1900 and crashing the digital infrastructure. The worldwide panic wreaked havoc on the market. First every company, organization and household rushed to replace computers or make them ready for 2000 causing a consumer-driven tech bubble. Next, when the sun came up on January 1 st and civilization didn’t end, no organizations required new computers for several years and the market correction began in March of 2000.

Then, we had the Great Financial Crisis in 2008 and 2009, which started during years of legislation leading to extreme mortgage lending and proliferation of mortgage-backed securities, and ended with banks failing, a credit crisis, real estate prices plummeting and equity markets dropping as much 40-60% within a few weeks.

Fast-forward to today. We’ve had an unprecedented global pandemic that hampered nearly every industry. Fear and lockdowns caused a slowdown in spending, which in turn led to a decrease in production and employee layoffs. What started with extraordinary printing of money and multi-trillion-dollar stimulus packages led to the inflationary conditions and higher prices for everything from energy to groceries. As the world tried to return to a semblance of normalcy and demand for goods increased, there was not enough manpower to sufficiently increase the supply.

Additionally, the correction has been more gradual than either Y2K or the GFC. While it has hit hardest in the past several months, markets have been tenuous, and the cost of living has been creeping up since the pandemic began in 2020.

How should investors react?

While some portfolio adjustments might be warranted, the first step is not to overreact. Since market downturns occur roughly once a decade, if you have prepared for this inevitable downturn, in almost all cases proceeding as if it were business as usual will get you through the correction and position you for growth once investor fear is replaced by opportunistic greed and markets begin to recover.

Of course, your specific actions will be dictated by personal factors, but here are my general rules of thumb:

If you’re a buyer, or 55 years old or younger

Buyers, or those who are actively depositing money into their investment accounts, should continue to do so. If you’re in your 20s, 30s, 40s or early 50s and adding money to a 401(k), IRA or other investment account with every paycheck or every month, keep it up and automate it if you can.

You’re getting an opportunity to buy the same securities you wanted to buy in the first place at a discounted price. Basically, it’s Black Friday on Wall Street and you’re first in line.

Right now, it’s a supply and demand game. People are seeing the drop in the stock market as a profit loss, rather than a price drop, so they stop buying. Now, there are more sellers than buyers. Once people decide that the bottom is near and start buying again, we will see a reversal.

I cannot say when that reversal will be—next week, in three months, in two years—but I am a firm believer that, at some point, there will be a recovery because there are earnings within the companies whose stocks are in the market. And, when there are earnings, there's a reason to buy.

If you’re a holder, or contemplating retirement soon

If you're 55 to 65 and you're contemplating graduating into retirement in the near term, you want to treat some of your assets with kid gloves. In other words, you want some assets that are relatively secure, but you're liable to still be buying.

You're in your peak earning years. In the accounts where you're buying, keep buying. In accounts where you're holding, meaning you're not adding to these accounts, be a lot more conservative because you don't have the same opportunity to buy low.

If you’re a seller, or withdrawing from your portfolio

Now, if you are 65 plus and you're either fully graduated into retirement or at the tail end of your career, you’re likely withdrawing from your portfolio, or you will be at some point in the near future.

For people withdrawing from their portfolios, the biggest thing that can hamper recovery is withdrawing from assets that are at-risk assets at a point in time when they're deflating or losing value. We don't want that to happen.

It’s time to segregate your assets. Have one account or more than one account that is extraordinarily secure, holding cash equivalents, short-term bonds and the other boring options that don’t put unneeded risk on your money.

You want to have five years or so of a runway so that you know where your income is going to come from without worrying about what the stock markets, real estate markets or other markets are doing during that period. If you do that, it will allow your other assets to stay invested and to stay in some form of growth security.

The lesson:

This market correction is both unique and not. It’s caused by different factors, but it’s similar because of the fear. The fear will drive markets down until greed takes over, and fear and greed are like a pendulum for investors. As soon as greed steps in, we will see more demand for securities, and we will see the market go the other direction.

So, be thoughtful of your age, your retirement goals and your risk tolerance, and speak to an advisor if you’re not sure how to proceed.

By Eric Brotman, Contributor