Why are market pullbacks healthy?

Let’s face it, the markets go up and down. That’s how it has always been and how it will always be. On average, the stock market experiences a 10% or more pullback every 18 months. One of the most difficult challenges investors face is understanding and accepting that those pullbacks are actually healthy. They aren’t fun, but they are normal and they are healthy.

So why are they healthy?

The example that I like to use with my clients is that of pruning a bush in your yard. You don’t prune the bush so that you have a smaller bush down the road, you prune it so that it can grow bigger and fuller the next time around. You cut off the dead ends and get rid of any obstacles that could prevent it from growing naturally. In many ways, that is what a market pullback is doing. It is getting rid of some excess so that the market has a new stronger base to grow off of for the future.

These pullbacks, or corrections as they are often called, can cause a lot of anxiety. However, we have to look beyond the short-term volatility. While damaging in the short-term, a correction can be positive, adjusting overvalued asset prices and providing buying opportunities for long-term investors. Having a longer-term plan and sticking to it is key to investment success.