If a Market Correction Is Imminent, This Simple Strategy Is Key to Protecting Your Investments

For years, the stock market has enjoyed strong performance, but this may not always be the case. America has not experienced a major bear market since 2022. Some investors are concerned that a market correction may be imminent. The S&P 500's Shiller CAPE ratio is approaching levels last seen during the dot-com bubble. However, even if a market correction is likely, it doesn't mean investors need to change their long-term investment strategies.

For those who are committed to long-term investing and can leave their money invested for five to ten years or more, a simple strategy could be the best approach. This involves consistently buying and holding a diversified portfolio of stocks. This can be achieved through dollar-cost averaging, which involves investing the same amount of money into the stock market each month.

A stock market correction is typically defined as a 10% decline in stock market prices, while a bear market is a 20% decline. Despite these declines, the stock market tends to grow over the long term due to factors like economic growth, improved company earnings, and increased investment from individuals and institutions. The S&P 500 has delivered average annual returns of 10% over the past 98 years, although this does not guarantee annual returns.

The Vanguard S&P 500 ETF (VOO) is a popular low-cost index fund that tracks the S&P 500 index, charging just 0.03% in fees. Over the past 16 years, VOO has delivered average annual returns of about 15%, which is higher than the S&P 500's long-term average return of 10% per year. This buy-and-hold strategy has been very successful for investors over the past decade and a half.

Some investors are worried about the current state of the S&P 500, questioning whether it's too expensive, too tech-focused, or overly dependent on the AI boom. Research from Vanguard suggests that international stocks may outperform U.S. stocks over the next 30 years. The Vanguard Total International Stock ETF (VXUS) offers broad diversification across 8,772 international stocks, delivering annualized returns of about 9.6% over the past 10 years and 9.2% over the past five years.

While there are no guarantees, long-term investors with diversified, low-cost index funds have still managed to generate strong returns, even during crises and market corrections. It's easy to say this when stocks are at all-time highs, but it remains true even during periods of declining prices. The key is to continue investing in a diversified mix of stocks, hold onto them for the long term, and avoid reacting to short-term market noise.