Dealing With Stock Market Corrections: Ten Do's and Don'ts
- Author Steve Selengut
- Published March 18, 2007
- Word count 899
A correction is a beautiful thing, simply the flip side of a rally, big or small. Theoretically, even technically I'm told, corrections adjust equity prices to their actual value or "support levels". In reality, it's much easier than that. Prices go down because of speculator reactions to expectations of news, speculator reactions to actual news, and investor profit taking. The two former "becauses" are more potent than ever before because there is more self-directed money out there than ever before. And therein lies the core of correctional beauty! Mutual Fund unit holders rarely take profits but often take losses. Additionally, the new breed of Index Fund Speculators is ready for a reality smack up alongside the head. Thus, if this brief little hiccup becomes considerably more serious, new investment opportunities will be abundant!
Here's a list of ten things to think about doing, or to avoid doing, during corrections of any magnitude:
Your present Asset Allocation should be tuned in to your long-term goals and objectives. Resist the urge to decrease your Equity allocation because you expect a further fall in stock prices. That would be an attempt to time the market, which is (rather obviously) impossible. Asset Allocation decisions should have nothing to do with stock market expectations.
Take a look at the past. There has never been a correction that has not proven to be a buying opportunity, so start collecting a diverse group of high quality, dividend paying, NYSE companies as they move lower in price. I start shopping at 20% below the 52-week high water mark... the shelves are beginning to become full.
Don't hoard that "smart cash" you accumulated during the last rally, and don't look back and get yourself agitated because you might buy some issues too soon. There are no crystal balls, and no place for hindsight in an investment strategy. Buying too soon, in the right portfolio percentage, is nearly as important to long-term investment success as selling to soon is during rallies.
Take a look at the future. Nope, you can't tell when the rally will come or how long it will last. If you are buying quality equities now (as you certainly could be) you will be able to love the rally even more than you did the last time... as you take yet another round of profits. Smiles broaden with each new realized gain, especially when most Wall Streeters are still just scratchin' their heads.
As (or if) the correction continues, buy more slowly as opposed to more quickly, and establish new positions incompletely. Hope for a short and steep decline, but prepare for a long one. There's more to Shop at The Gap than meets the eye, and you run out of cash well before the new rally begins.
Your understanding and use of the Smart Cash concept has proven the wisdom of The Investor's Creed (look it up). You should be out of cash while the market is still correcting... it gets less scary each time. As long your cash flow continues unabated, the change in market value is merely a perceptual issue.
Note that your Working Capital is still growing, in spite of falling prices, and examine your holdings for opportunities to average down on cost per share or to increase yield (on fixed income securities). Examine both fundamentals and price, lean hard on your experience, and don't force the issue.
Identify new buying opportunities using a consistent set of rules, rally or correction. That way you will always know which of the two you are dealing with in spite of what the Wall Street propaganda mill spits out. Focus on value stocks; it's just easier, as well as being less risky, and better for your peace of mind. Just think where you would be today had you heeded this advice years ago...
Examine your portfolio's performance: with your asset allocation and investment objectives clearly in focus; in terms of market and interest rate cycles as opposed to calendar Quarters (never do that) and Years; and only with the use of the Working Capital Model (look this up also), because it allows for your personal asset allocation. Remember, there is really no single index number to use for comparison purposes with a properly designed value portfolio.
So long as everything is down, there is nothing to worry about. Downgraded (or simply lazy) portfolio holdings should not be discarded during general or group specific weakness. Unless of course, you don't have the courage to get rid of them during rallies... also general or sector spefical (sic).
Corrections (of all types) will vary in depth and duration, and both characteristics are clearly visible only in institutional grade rear view mirrors. The short and deep ones are most lovable (kind of like men, I'm told); the long and slow ones are more difficult to deal with. Most recent corrections have been short (August and September, '05; April though June, '06) and difficult to take advantage of with Mutual Funds. So if you over think the environment or over cook the research, you'll miss the party. Unlike many things in life, Stock Market realities need to be dealt with quickly, decisively, and with zero hindsight. Because amid all of the uncertainty, there is 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...
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"Article source: https://articlebiz.com
There are no posted comments.
- Leveraging ChatGPT AI for Smarter Stock Market Analysis and Investments
- Shib, Doge, and Pepe Have a New Competitor: The Rise of $FUFU Token
- Unlocking Wealth: The Power of Apartment Syndication in Real Estate Investing
- 6 Reasons to Invest in Bitcoin
- Blockchain and AI Convergence: A New Era of Innovation
- Financial Planning for Small Business Owners: Tips for Success
- Crypto Hedge Funds: An Insightful Guide
- Choosing Between IEO and IDO Crypto Fundraising Methods: A Comprehensive Comparison
- What is Forex trading psychology
- INFLATION: WHAT IS IT? HOW IS IT MEASURED? WHAT ARE PRICE INDEXES?
- Solaxy Marketplace: Revolutionizing Carbon Markets with Unprecedented Transparency
- Exploring the Benefit of PrimeXBT: Empowering Traders in The Digital Asset Space
- How To Invest For Passive Income - Find Now
- 12 GOLDEN RULES OF CRYPTOCURRENCY TRADING
- Exchange Perfect Money to Litecoin (LTC)
- 5 Companies to Consider Investing for $19.00 to $58.00 Per Share
- 10 Common Mistakes New Traders Make and How to Avoid Them.
- 5 Strategies for Investing in a Volatile Market.
- Don’t Put All Your Eggs in One Basket: How Diversifying Your Investment Portfolio Can Reduce Risk.
- Active or Passive? Which Investing Strategy Should You Choose?
- Unlocking the Secrets of Savvy Investing: What Investors Really Want to Read About.
- The Economy’s Domino Effect: How Economic Data and News Can Impact Your Investments.
- Cryptocurrency Investments: A Wild Ride of Potential Gains and Devastating Losses.
- Trading Like a Pro: 6 Must-Have Traits for Success.
- 5 Signs it’s Time to Say Goodbye to Your Investment.
- Navigating the Impact of Rising Interest Rates on Investments.
- Revolutionising Investing? The Role of Artificial Intelligence and Machine Learning.
- Investing 101
- The Upward Momentum in Crypto May Not Live Forever
- What is a free PayPal gift card?