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Dealing With Market Corrections: Ten Do’s and Don’ts

A market correction is a marvelous event, basically the opposite side of a rally, big or small. In theory, even technically are considered, corrections adjust equity prices to their real value or “support levels”. In reality, it’s much easier than that. Prices trend down because of speculator reactions to anticipations of news, speculator reactions to actual news, and investor profit taking. The two former “becauses” are more powerful 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. Opportunities abound!

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

1. You should have adjusted your present Equity Allocation in to your goals and objectives. Defy the impulse to reduce your Asset allocation because you expect a further fall in stock prices. Not only you are making the mistake of attempting to time the market , which is (rather obviously) impossible, but also you are missing out on buying assets at low prices. Proper Asset Allocation has nothing to do with market expectations.

2. The beauty of correction is that, if you take a look at the past,  it is a proven buying opportunity. There has never been a correction that has not proven to be a buying opportunity, so start selecting a different group of high quality, dividend paying, NYSE companies as their move prices move down. I start my shopping spree at 20% below the 52-week high, and before few are left on the shelvesl.

3. Don’t hoard that “smart cash” you amassed in the last rally, and do not look back and get yourself perturbed as you might buy some issues too shortly. There are no crystal balls, and no place for hindsight in an investment plan.

4. Have a look at the future. Nope, you can not tell when the rally will come or how long it will last. If you’re purchasing quality stocks now ( as you definitely might be ) you’ll be able to love the rally even more than you did the last time as you take yet one more round of profits. Smiles broaden with each new realized gain, particularly when most folks are still head scratching’.

5. 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.

6. Your understanding and use of the Smart Cash concept has proven 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 your cash flow continues unabated, the change in market value is merely a perceptual issue.

7. Despite reduced prices, you notice that your invested funds is still growing, it is adviseable that you inspect your holdings for opportunities to average down on cost per share or to extend yield ( on fixed revenue instruments ). Inspect both basics and price, depend on your experience, and do not force the issue.

8. 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…

9. 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, 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.

10. Finally, ask your broker/advisor why your portfolio has not yet surpassed the levels it boasted five years ago. If it has, say thank you and continue with what you’ve been doing. This one is like golf, if you claim a better score than the reality, you’ll eventually lose money.

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

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 corrections are “45s” (August and September, ’05), and difficult to take advantage of with Mutual Funds. But amid all of this uncertainty, there is one indisputable fact: there has never been a correction that has not succumbed to the next rally… its more popular flip side. So smile through the hum drum Everydays of the correction, you just might meet Peggy Sue tomorrow.

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