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All a correction is, is the opposite side of a rally, either big or small. In other words, a correction is a reverse movement, typically downward, in the price of an individual stock or bond.
In theory, corrections change the share prices to their actual price or “support levels”. In fact, it’s much simpler than that. Stock prices go down because of trader reactions to anticipations of news, or the traders reactions to real news, and finally, traders taking profit. Thus, if this correction continues, and becomes considerably more severe, then fresh investment opportunities will become more readily available.
Here’s a list of ten concepts to think about doing, or to keep away from, during any corrections that might occur.
1. Your current portfolio should be keyed in to your long-term goals and financial objectives. You ought to resist the urge to decrease your portfolio just because you expect an additional fall in share prices. Because then you would be attempting to time the market, which is effectively impossible, as you well know. Any decisions affecting your portfolio should have nothing to do with Stock Market expectations.
2. Looking at historical corrections, there has never been a correction thus far that has not turned out to be a buying chance. So this is point in time when you can start collecting a diverse group of high quality, dividend paying, companies when they have moved lower down in value.
3. As I have said on a number of occasions, there are no crystal balls, and absolutely no place for retrospection in an investment strategy. Buying too soon, in the acceptable portfolio percentage, is just about as important to long-term investment achievement as selling ahead of time is, in the course of rallies.
4.Now to take a peek at the future.There is no way you can forsee when a rally will arrive or how long it will go on. All you can do is enjoy it while it lasts, as there are no guarantees as to how long it is going to last for.So, make hay while the sun shines.
5. As the correction continues, try to buy more gradually as opposed to more quickly. Hope for a rapid and sharp decline, but be equipped for a protracted one just in case. Otherwise you may run out of cash well before the latest rally commences.
6.You ought to be out of cash while the market is still correcting. As long your cash flow continues unabated, the fluctuation in market value is just a perceptual issue.
7.Scrutinize your share holdings in your portfolio for opportunities to average down on cost per share or to increase income (on fixed income securities).
8. Recognize new buying opportunities using a reliable set of rules. (Hopefully you have a preset trading plan in place already?)
9. Continually analyze your portfolio’s performance against your asset allocation and investment objectives. Keep them clearly in mind.
10.Just so long as everything is down, there is nothing really to be concerned about. Downgraded or non performing portfolio holdings should not be discarded during general or group specific weakness. Unless of course, you don’t have the valor to get rid of them during rallies.
Corrections will constantly vary in depth and time, and both characteristics are clearly visible only in hindsight. The short and deep ones are just about always the most lucrative. Whereas the long and sluggish ones are a lot more difficult to cope with.
Always bear in mind that Share Market rallies need to be addressed quite rapidly and decisively and with zero hindsight. Because amidst of all of the ambiguity, there is one incontestable fact, there has never been a correction or rally that has not eventually buckled to the next rally or correction that comes along.
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