Dealing With Market Corrections Ten Do s and Don ts
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Dealing With Market Corrections: Ten Dos and Don'ts
Summary
Market corrections can be beneficial, acting as the counterpart to rallies. As long as your cash flow remains steady, changes in market value are mainly about perception.Introduction
Market corrections may seem daunting, but they are simply the opposite of rallies. While technically seen as price adjustments to actual value, corrections are primarily driven by speculator reactions and investor profit-taking. With more self-directed money than ever, opportunities abound?"especially with mutual fund holders who often sell at a loss. Here’s how you can navigate these corrections effectively.Ten Dos and Don'ts During Market Corrections
1. Stick to Your Asset Allocation
Align your investments with your goals. Avoid the temptation to reduce your equity allocation based on market predictions, as timing the market is nearly impossible.
2. Look at Historical Trends
Every past correction has been a buying opportunity. Start acquiring high-quality, dividend-paying NYSE stocks as prices drop, ideally at 20% below their 52-week high.
3. Utilize Smart Cash Wisely
Use the cash saved during the last rally to invest. Don’t stress over buying at imperfect times?"nobody can predict the future perfectly.
4. Anticipate Future Rallies
Although the timing and duration of rallies are unpredictable, investing in quality stocks now positions you to benefit when the market recovers.
5. Strategically Pace Your Investments
As the correction continues, buy more slowly and establish new positions gradually. Prepare for both short and long-term declines.
6. Employ the Smart Cash Concept
Aim to be out of cash while the market is still correcting. With continuous cash flow, market value changes are just perceptual.
7. Evaluate Working Capital
Despite falling prices, focus on growing your capital. Look for opportunities to average down or increase yields on fixed income securities using your experience.
8. Identify New Opportunities Consistently
Follow a steady set of rules to recognize buying opportunities, regardless of market conditions. Focus on value stocks for less risk and peace of mind.
9. Assess Portfolio Performance Wisely
Review your portfolio against your asset allocation and objectives, considering market and interest rate cycles. Use the Working Capital Model for accurate comparisons.
10. Consult Your Broker/Advisor
If your portfolio hasn't surpassed its levels from five years ago, ask why. Otherwise, if it's performing well, continue with your current strategy.
11. Keep Perspective
When everything is down, it often means there’s less to worry about.
Conclusion
Market corrections come in varying depths and durations, often only clear in hindsight. The deeper, shorter corrections are generally easier to handle, though most corrections are gradual and less suited to mutual fund adjustments. Despite uncertainties, one fact remains: every correction eventually gives way to a rally. So, keep a positive outlook, and you may find future opportunities just around the corner.You can find the original non-AI version of this article here: Dealing With Market Corrections Ten Do s and Don ts.
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