A stock market correction is a beautiful thing, simply the flip side of a rally, big or small, and here are ten things to do and don’t do. 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 “because” 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 reality to 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. For more on asset allocation modeling, you can visit https://investor.vanguard.com/investing/how-to-invest/asset-allocation.
- 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 at a 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. In the right portfolio percentage, buying too soon is nearly as important to long-term investment success as selling too 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 scratching their heads.
- As (or if) the correction continues, buy more slowly instead of 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 have proven the wisdom of The Investor’s Creed (look it up). It would help if you were 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, despite 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 corrections. That way, you will always know which of the two you are dealing with despite 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 asset allocation. Remember, there is 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 dare to get rid of them during rallies… also general or sector-specific (sic).
Corrections (of all types) will vary in depth and duration, and both characteristics are visible only in institutional-grade rearview 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 (February 19, 2020, to March 23, 2020) and difficult to take advantage of with Mutual Funds. So, if you overthink the environment or overcook 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. For more on market corrections, visit https://awealthofcommonsense.com/2021/02/a-short-history-of-u-s-stock-market-corrections-bear-markets/.
Suppose you are not comfortable with investing, determining your proper asset allocation, or need financial assistance in general feel free to contact us at https://kgmeyerpc.com/contact/. We are a fee-only fiduciary Registered Financial Consultant with ethics approved based in Nashville, Tennessee.
