A Market Correction May Be Coming. How Should You Prepare?

The past two years have been a roller coaster for investors. The stock market saw gains during much of the Covid-19 pandemic, but then dropped—and bounced right back—earlier this year. If the U.S. Federal Reserve raises interest rates this month, which it’s widely expected to do, investors may be in for yet another curveball: a market correction.

A market correction is when the price of a security, asset or financial market drops 10% to less than 20% from its most recent peak. This dip may occur quickly and without warning, and is triggered when more investors sell rather than buy—a decision prompted by reasons as varied as negative perceptions of the market, a weakening economy or a major world event, like war.

Though unpleasant, market corrections aren’t uncommon. There were seven between 2000 and 2020, according to Yardeni Research. They tend to be short lived, lasting anywhere from a few weeks to a few months, though they can stretch on for longer.

Corrections can be an opportunity for the market to reset and rebalance itself and may even open up potential buying opportunities. But they can also be detrimental to savings in the short term. For savers who are in or near retirement—and whose working days are largely behind them—market swings can significantly impact retirement planning. The good news is, there are steps you can take to help protect your investments before the next dip.

While the prospect of losing hard-earned money during a market correction can be unsettling, experts advise against letting emotions guide your decisions. Making sudden moves in response to a volatile market may make sense in the short term but could negatively impact your investment savings in the long run.

Instead, stay focused on the big picture and your financial plan. Consider revisiting your portfolio and ensuring it’s balanced and diversified, which can help mitigate risk. If you’re in or nearing retirement, you may want to consider whether it’s time to shift toward more conservative investments, which can better withstand market declines. Examples of these investments include CDs, money market accounts, government bond funds and guaranteed income funds.

Another possible safeguard: Invest up to five years’ worth of expenses in cash or cash equivalents, such as short-term bonds, certificates of deposit (CD), high-yield savings accounts or U.S. government bonds. These are usually the most liquid of all assets. In the event of an unforeseen major expense, you can dip into them instead of selling off securities whose value may have dropped during the correction.

With all the savings products available, finding the ones that make sense for you can feel overwhelming. With an exclusive network of banks and competitive savings products, Raisin makes it easy to compare and select a wide range of FDIC-insured high-yield savings products. Even better? There are no fees to enroll. For more information on how to open a Raisin account and simplify saving for your future, please visit our website.

Why Savings Accounts Should Be Part of Your Retirement Strategy

How to Select a CD That's Right for Your Needs

How to Use a High-Yield Savings Account to Grow Your Money Faster

How to Diversify Your Cash Savings

How much do you need to save for retirement? Here are some rules of thumb