February 18, 2014

5 Things to Do (and Not Do!) When the Market Corrects

The rocky market of early 2014 may be stressful for investors, but investment experts generally view market corrections as a healthy and beneficial part of a market cycle. It’s called a “market correction” because sudden or long spurts of growth can result in stock prices that are more a reflection of investor exuberance than fundamentals; a correction can reset stock prices back to reasonable and reasoned valuations.

Here are five suggestions for staying out of trouble during corrective activity:

1. DON’T panic! As stated in friendly lettering on the front of The Hitchhiker’s Guide to the Galaxy, don’t let panic force you into making rash decisions. Remember that you are a long-term investor, and that your long-term strategy was designed to serve you in all different types of market environments, including this one.

2. DON’T sell low. Remember the investor’s credo, “buy low, sell high.” It’s a good reminder for investors that when performance heads south, that’s the worst time to sell. Often, a decline or correction is just making room for more growth in the long term.

3. DO look for bargains in value. In every other area of consumption, consumers carefully shop the sales, looking for good deals. Investing is no different; a dip in stock prices may be an opportunity to find stocks on sale.

4. DO pay attention to your reactions. A little bit of fear is natural, but if you find that your anxiety is getting out of hand, it may be a signal that you are invested too aggressively for your risk tolerance. Drops in stock market performance are an opportune time to gauge your tolerance for risk in a real-life situation, rather than just theoretically. Don’t rush to make changes (see #2), but consider whether adjusting your long-term investment strategy would be appropriate.

5. DO focus on the fundamentals. Portfolio diversification, manager selection, portfolio monitoring – these are the tools of a successful investor. If you’ve done the fundamental work, you’ve positioned your portfolio to meet the challenges of volatility.

They say that what goes up must come down, but in the stock market, what goes down usually comes back up again. In fact, since 1930, the stock market (as measured by S&P 500 calendar returns) has experienced negative years only 27% of the time, and positive years 73% of the time. Keep a big-picture perspective during times of market volatility and let your portfolio strategy work for you.