A stock market correction is often a beautiful thing, and simply the reverse side of a move, big or small. In theory, even theoretically I’m told, corrections fine-tune equity prices with their genuine value or “support levels”. In fact, it may be much simpler than that.
Since we are always never too far away from the next stock market correction (and may even be in one at the time of you reading this), it is a topic that need’s some attention. How do you overcome a stock market correction and exit as unscathed as possible?
Stock prices drop because of markets’ reaction to expectations of news, speculator responses to actual news, in addition to investor profit taking. The two former “becauses” are definitely more powerful than ever before because there is a great deal more self directed capital in play than ever before. And therein lies the core of the correctional splendor! Mutual Fund unit holders seldom take profits yet often take losses. Opportunities therefore are around every corner!
Here’s a listing of 9 things to do (or to think about) in the course of corrections of any magnitude:
- Your current asset allocation should have been calibrated towards your goals and ambitions. Resist the urge to decrease your equity allocation because you anticipate a further fall in stock prices. That would be an endeavor for you to ‘time the market’, which happens to be unachievable, particularly over multiple corrections. Proper asset allocation has nothing to do with market expectations at a given time period.
- Evaluate the past. There has not ever been a correction which has not later been confirmed to be a good buying opportunity. Therefore start gathering a diverse group of high-quality, dividend paying stocks while they move lower in value. We begin shopping at twenty five percent below the 52-week high water mark, and there is usually plenty to choose from.
- Try to resist the urge to hoard that smart cash you stored throughout the last rally, and don’t look back and get yourself agitated since you might buy prematurely. You will find zero crystal balls, with no place for hindsight in an investment plan.
- Check out the longer term. You can’t tell when move will happen or for how long it will last. If you are acquiring quality equities now (as you certainly could very well be) it will be easier to enjoy the rally far more than you did the last time. Smiles tend to broaden with each new realized gain, in particular when most men and women are still head scratching and pondering their next move.
- In case the correction continues, acquire positions more slowly than quickly, and additionally establish new positions in phases to average your dollar cost per share. Hope for a brief and steep decline, yet plan for a long one.
- You ought to be out of cash as the markets continue to correcting. The idea becomes less and less daunting each time. For as long your cash flow proceeds unabated, the change in market value is only a perception problem.
- Remember that your own working capital continues to grow, in spite of slipping prices, and additionally examine your current positions for opportunities to average down or to increase yield. Analyze equally fundamentals plus price, lean hard on your experience, and don’t force the issue. Go back to your trading plan!
- Identify new buying opportunities employing a consistent set of rules for whether this is really a correction. That way you will constantly know which of the two you happen to be dealing with in spite of what the Wall Street propaganda mill spits out. Concentrate on value stocks; it’s just a lot easier, and also being less risky, and better for your personal peace of mind.
- Manage your emotions. This is an easy one to write, but a more difficult one to execute. Manage your emotions during a correction by referring back to some of the above steps. Look at fundamentals, create your own price targets during euphoria and fear cycles of a market and monitor those in line with current prices. Price is temporary, and indeed so are corrections. Need help evaluating stock prices?
Each correction will vary in depth and duration. The short-lived and sharp are easiest to deal with, whereas those that are long and slow are more difficult. Nevertheless amongst all of this uncertainty, there is one undeniable truth: there has never been a correction that has not succumbed to another move to the upside.