The Nasdaq Has Entered Correction Territory. History Says This Will Happen Next.

A stock market correction is a drop in a major stock market index between 10% and 20% from recent highs. That’s exactly what has happened with the Nasdaq Composite (^IXIC 1.22%) over the past three months. Since reaching a new high on Dec. 16, the Nasdaq Composite is down more than 13% through Tuesday’s close and in correction mode.

There typically isn’t one single event that causes a stock market correction; it’s often a combination of a few factors. It could be because of the economy, political happenings (domestic and international), investor speculation, or any of the like.

There is a silver lining to the current Nasdaq correction: History may be on your side with what happens next.

^IXIC data by YCharts

How has the Nasdaq bounced back from previous corrections?

Nobody likes seeing their stock portfolio drop, but stock market corrections have been around virtually as long as the stock market itself. They’re a natural part of the stock market cycle.

Below are a few notable Nasdaq corrections (with some turning into bear markets) in the past two decades and how the index has performed since bottoming out in each:

Data sources: YCharts. Percentages are rounded to the nearest whole percent and may vary based on viewing date.

Aside from the specific percentages, the larger point is that regardless of short-term slumps in the Nasdaq (or major stock market indexes in general), the long-term value it has returned has been impressive.

Of course, past performances don’t guarantee that it will happen that way again, but the historical long-term resilience should reassure investors that it isn’t time to sound the alarm and go into full panic.

If anything, this can be a time to invest in the index while it’s trading at a “discount” in order to potentially increase your gains down the road.

What’s the best way to invest in the Nasdaq Composite?

The Nasdaq Composite is an index, but folks interested in investing in it should consider an exchange-traded fund (ETF) that follows the index. A solid option is the Fidelity Nasdaq Composite Index ETF (ONEQ 1.12%).

Consisting of just over 870 holdings, the ETF doesn’t perfectly mirror the Nasdaq Composite, which tracks almost every stock trading on the Nasdaq stock exchange. Regardless, the ETF is a great way to gain exposure to the index at a low cost.

Below are the ETF’s top 10 stock holdings:

Data source: Fidelity. Percentages as of Feb. 28.

Investing in this ETF exposes you to some of the world’s top companies, though it is heavily skewed to the tech sector, accounting for almost half of the fund.

Focus on investing through the good, bad, and ugly

Since this ETF was created in September 2003, it has experienced great times, terrible times, and everything in between. Still, it has outperformed the S&P 500 — which is often used as the benchmark for stock and ETF performance — in that span.

ONEQ data by YCharts

Instead of focusing on the “right” time to invest, one of the best things you can do is embrace dollar-cost averaging.

Dollar-cost averaging typically involves putting yourself on a set investing schedule and sticking to it regardless of stock prices at the time. It doesn’t matter if stock prices are rising, falling, or remaining stagnant; your job is to approach investing as business as usual.

Sometimes, you’ll invest when prices are overvalued; sometimes, you’ll invest when they’re undervalued. The key is to trust that, over time, dollar-cost averaging will help offset market volatility and work out in your favor.