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Here's why a market correction could be a good thing for your 401(k)

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The U.S. stock market fell into correction territory on Thursday due to fears surrounding the spread of the coronavirus.

"The uncertainty this week is all about the virus," says Charles L. Failla, a New York-based certified financial planner. "Specifically, it's that we don't know how much it will spread, what the mortality rate will be for those infected and how long this will last and impact economic growth."

A market correction happens when there is a 10% decline in stocks from their most recent record high. It took just six sessions for the S&P 500, a major market index, to fall into correction territory, the most rapid downfall in history. Past corrections of this sort have typically resulted in a 13% drop and took around four months on average to recover, if they don't end up being bear markets of at least a 20% decline.

If you have an investment-based retirement fund, such as a 401(k), you might wonder what that means for you — and for the 66% of millennials who have market investments of some sort.

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Why a market correction could actually help you

At first, experts say this correction may cause your 401(k) to suffer. But once the market bounces back, these corrections can be a good thing for investors — and especially "for both younger investors and long-term investors," says Ryan Marshall, a certified financial planner at Ela Financial Group.

For younger investors, these corrections are considered "an excellent opportunity" because "they have a longer time horizon before they will need their money in a 401(k) plan. Ten years from now there is a great chance the market will be higher than where it is today," Marshall says.

If I polled my older clients, almost all wish they added to these market pullbacks in hindsight. Longer term investors view these pullbacks as opportunities and not setbacks.
Ryan Marshall
Certified financial planner at Ela Financial Group

Additionally, for younger people, who generally have less money to invest, they typically have far less to lose than a more senior investor who has invested for many more years. For instance, a 10% stock decline for an investor who has only contributed $2,000 is far less significant than a more experienced investor who has banked $200,000 in their 401(k) over the years.

For those who plan on investing on a long-term basis, similar logic applies. So long as you won't be needing to cash out your investment money in the near future, these kinds of pullbacks will be made up over the long term as the U.S. market and economy recovers. They actually can offer great buying opportunities for long-term investors who are years from retirement. Warren Buffett told CNBC at the start of this week that he is pretty much always buying during sell-offs and always holding for the long term.

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A time to buy

Another way to think about these market pullbacks is to view them as a sale. As CNBC's Jim Cramer puts it, when these corrections happen, "the market's throwing a sale that it doesn't need to throw." What Cramer's saying is that when the market dips, share prices become more affordable, which can make it a prime opportunity to invest — so long as you have plenty of time before you'll be needing to cash out your investment.

"If I polled my older clients, almost all wish they added to these market pullbacks in hindsight. Longer-term investors view these pullbacks as opportunities and not setbacks," Marshall says.

Regarding how to respond to this week's correction, experts recommend sticking to your usual investment patterns, especially if you won't be retiring or needing to cash out your investments any time soon.

"Panicking and going completely to cash in your employer 401(k), robo-advised strategies or personal brokerage accounts can end up derailing your investment goals for the long run," says Jon Ulin, CFP and founder of Ulin and Co. Wealth Management.

Don't miss: Here's what millennials need to know about market corrections

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