The incorrect way to make money from corrections

The iconic investor Peter Lynch once said, "Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves." If you are not comfortable with stock market jargon, the first thing you should be asking is why a drop in stock prices is called a correction? I mean, if stocks fall lower than it makes sense, then that's a mistake rather than a correction. But that's the jargon.

Suggested read: Investing the Peter Lynch way

Anyhow, among a rather large proportion of investors, there is now a mounting fear of a correction. There are people who are holding on to their investments but are getting increasingly skittish, and are ready to run out at a moment's notice. There are others who are outside and ready to invest, but only once the correction is over. It's a little bit like the doors of a local train when a station is approaching. The ones inside are preparing to rush out, while those outside are waiting to rush in.

Someone like Peter Lynch has spent a lifetime observing such behaviour and seen how this perpetual wait to time one's investments to the coming and going of a correction actually detracts from the real challenge - identifying good investments, investing in them regularly and sticking to them. The part that the correction-watchers don't understand is that for a long-term investor who follows an idea as simple as a mutual fund SIP (or its stock equivalent, cost averaging), investing through a correction is an advantage.

When you keep investing during a correction, it enhances your final return without having to be correct about the correction. During 2008-2009, those few who kept investing reaped rich rewards for not bothering about corrections. It's something that more investors should be doing.

Also read: Time in the market is paramount