Stock Market Corrections: 8 Critical Steps To Weather The Storm
What do you think of when you hear the phrase stock market correction?
If the major media is to be believed, a stock market correction is equivalent to Armageddon. The sky is falling, etc, etc.
Truth be told, a stock market correction can be a beautiful thing. It is the opposite of a rally, nothing more nothing less. In theory, corrections adjust equity prices to their actual value or “support levels”. In reality, it is much simpler than that.
Prices drop when speculators respond to expected news, actual news, and/or investor profit taking. The first two are much more potent than at any point in history simply because there’s much more self-directed money out there than ever before. And therein lies the jist of correctional beauty! Mutual Fund unit holders rarely take profits but often take losses. Additionally, Index Fund Speculators are ready for any reality check. Therefore, if this brief small hiccup worsens to any degree, new expense opportunities will probably be numerous!
I’ve gathered a list of 8 points to complete (or avoid doing) during a stock market correction.
Study history:
Corrections always lead to buying possibilities, so start collecting a diverse group of high quality, dividend paying, NYSE businesses as their prices drop.
Observe the future:
Obviously, it’ll help if you have a crystal ball. If not, then you can’t accurately tell when the rally will show itself or how long it will last. Nevertheless, if you are buying high quality equities now (as you certainly should be) you will probably be able to love the rally even more than you did the last time, as you take yet an additional round of profits. Smiles broaden with each new realized gain, especially when most Wall Streeters are still in the process of taking large losses. Stock market corrections become less of a threat and much more of a cash generating opportunity.
Focus your Asset Allocation on your long-term objectives.
Resist the urge to decrease your Equity allocation simply because you anticipate a further fall in stock prices. That would be an attempt to time the marketplace, which is (rather obviously) impossible. Asset Allocation decisions ought to have nothing to do with stock market correction expectations.
Don’t hoard that “smart cash”
You most likely earned it during the last rally. Now isn’t the time to look back and get angry simply because some issues were acquired too quickly. Buying too quickly, within the right portfolio percentage, is nearly as essential to long-term investment success as selling too quickly is during rallies.
Slow down the rate of purchasing as the stock market correction continues.
Hope for any short decline, but prepare for any long one. There’s more to this strategy than meets the eye, and you don’t want to run out of cash before thebeginning of a new rally.
Note that your Working Capital is still growing.
This in spite of falling prices, and look at your holdings for possibilities to average down on cost per share or to increase yield (on fixed income securities). Examine both fundamentals and price, focus hard on your experience, and do not force the issue.
Continually analyze the performance of your portfolio.
With your asset allocation and expense objectives clearly in focus, you need to remember this: there is truly no single index number to use for comparison purposes with a correctly created value portfolio. So long as everything is down, there is absolutely nothing to worry about. Downgraded (or merely lazy) portfolio holdings should not be discarded throughout general or group specific weakness. Unless of course, you do not have the guts to get rid of them during rallies.
Understand that corrections (of all kinds) will vary in depth and duration.
They don’t become obvious until long after the fact. The short and deep ones are best; the long and slow ones are a little uglier.
Bottom Line:
Unlike many things in life, Stock Marketplace realities need to be dealt with quickly, decisively, and with zero hindsight. Because among all of the uncertainty, there’s one indisputable fact that reads equally well in either market direction: there has never been a correction/rally that has not succumbed to the next rally/correction.
There is a wealth of information on stock market corrections, and other investment topics at this site: USA Stock Market. Please feel free to browse the hundreds of articles, videos, etc on the exciting subject of investments.
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