Dealing with Market Corrections: Ten Pros and Cons

A correction is a beautiful thing, just the flip side of a rally, big or small. I’m told that in theory, even technically, corrections adjust stock prices back to their true value or “support levels”. Actually, it is much easier than that. Prices decline due to speculators’ reactions to news expectations, speculators’ reactions to actual news, and investors’ profit-taking. The first two “because” are more powerful than ever because there is more “self-directed” money than ever. And therein lies the core of correctional beauty! Mutual fund unit holders rarely take profits but often take losses. Opportunities abound!

Here is a list of ten things to do and/or think about doing during corrections of any magnitude:

1. Your current asset allocation should have been aligned with your goals and objectives. Resist the urge to reduce your stock allocation because you expect a further drop in stock prices. That would be an attempt to time the market, which is (obviously) impossible. Proper asset allocation has nothing to do with market expectations.

2. Take a look at the past. There has never been a correction that hasn’t proven to be a buying opportunity, so start collecting a diverse group of high-quality NYSE companies that pay dividends as they decline in price. I start shopping 20% ​​below the 52 week high mark and the shelves are full.

3. Don’t hoard that “smart money” you racked up during the last rally, and don’t look back and fret because you might buy yourself some trouble too soon. There are no crystal balls and no place for hindsight in an investment strategy.

4. Take a look into the future. No, there is no telling when the rally will come or how long it will last. If you’re buying quality stocks now (as you certainly could be), you’ll be able to enjoy the rally even more than last time… as you post another round of profits. Smiles widen with every new win made, especially when most people are still scratching their heads.

5. As (or if) the correction continues, buy more slowly instead of faster and establish new positions incompletely. Expect a short, steep decline, but be prepared for a long one. There is more to shopping at The Gap than meets the eye.

6. Your understanding and use of the Smart Cash concept comes from the wisdom of The Investor’s Creed. You should be out of cash while the market is still correcting. [It gets less and less scary each time.] As long as your cash flow continues unabated, the change in market value is simply a matter of perception.

7. Keep in mind that your working capital continues to grow, despite falling prices, and examine your holdings for opportunities to lower average cost per share or increase yield (in fixed income securities). Examine both the fundamentals and the price, lean heavily on your experience, and don’t force the issue.

8. Identify new buying opportunities using a consistent set of rules, recovery or correction. That way you’ll always know which one you’re dealing with regardless of what the Wall Street propaganda factory spits out. Focus on value stocks; it’s just easier, plus it’s less risky and better for your peace of mind. Just think where you would be today if you had followed this advice years ago…

9. Examine the performance of your portfolio: with your asset allocation and investment objectives clearly in focus; in terms of market cycles and interest rates instead of Calendar Quarters (never do that) and Years; and only with the use of the Working Capital Model, because it allows the allocation of your personal assets. Remember, there really is no single index number that can be used for comparison purposes with a properly designed stock portfolio.

10. Finally, ask your broker/advisor why your portfolio still hasn’t risen above the levels it was five years ago. If so, give thanks and continue what you have been doing. This is like golf, if you claim a better score than reality, you will eventually lose money.

11. One more thought to consider. As long as everything is down, there is nothing to worry about.

Corrections (of all kinds) will vary in depth and duration, both of which are clearly visible only on institutional grade rearview mirrors. The short and deep ones are the most adorable (sort of like men, I’m told); the long and slow ones are more difficult to handle. Most of the corrections are “45” (August and September 2005) and are difficult to take advantage of with mutual funds. But amidst all this uncertainty, there is one indisputable fact: there has never been a correction that has not succumbed to the next rally… its most popular reversal. So smile through the buzz Every day of proofreading, tomorrow you may meet Peggy Sue.