The Beauty of Corrections
Market corrections adjust equity prices to their actual value or “support levels.” However, prices can also go down due to speculator reactions to expectations of news, speculator reactions to actual news, and investor profit-taking. Mutual fund unit holders rarely take profits but often take losses, creating opportunities for investors.
10 Do’s and Don’ts for Dealing with Market Corrections
- Stick to your asset allocation and resist the urge to decrease your equity allocation because of falling stock prices. Proper asset allocation has nothing to do with market expectations.
- Use market corrections as a buying opportunity to collect a diverse group of high-quality, dividend-paying NYSE companies as they move lower in price.
- Don’t hoard cash or let hindsight influence your investment strategy. There are no crystal balls, and no one can predict the future.
- Focus on quality equities and take advantage of the rally when it comes.
- Buy more slowly as the correction continues and establish new positions incompletely. Prepare for a long decline.
- Use the smart cash concept to stay invested during market corrections. As long as your cash flow continues unabated, the change in market value is merely a perceptual issue.
- Examine your holdings for opportunities to average down on cost per share or to increase yield on fixed income securities. Lean hard on your experience and don’t force the issue.
- Focus on value stocks and use a consistent set of rules to identify new buying opportunities.
- Examine your portfolio’s performance in terms of market and interest rate cycles and only with the use of the working capital model.
- Ask your broker/advisor why your portfolio has not yet surpassed the levels it boasted five years ago. If it has, continue with what you’ve been doing.
FAQs
What is a market correction?
A market correction is a decline of 10% or more in the value of a stock, bond, commodity, or index.
How often do market corrections occur?
Market corrections occur periodically and are a natural part of investing. They can happen once a year or once every few years.
How long do market corrections last?
The duration of market corrections varies, but they typically last a few weeks to a few months.
Should I sell my investments during a market correction?
It’s generally not advisable to sell your investments during a market correction. Corrections are often followed by a rally, and selling during a downturn can result in missed opportunities for gains.
How can I take advantage of a market correction?
You can take advantage of a market correction by using it as a buying opportunity to collect high-quality, dividend-paying stocks at lower prices. Stick to your asset allocation and focus on value stocks to minimize risk.
