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

Dealing With Stock Market Corrections Ten Do's and Don'ts

Stock Market Corrections (of all types) will vary in depth and duration, and both characteristics are clearly visible only in institutional-grade rearview mirrors. The short and deep ones are the most charming.

Stock Market Corrections

A correction is a beautiful thing, just the flip side of a rally, big or small. Theoretically, actually, technically I’m told, stock market corrections adjust equity prices to their actual value or “support levels”. In reality, it’s much more uncomplicated than that. Prices go down because of speculator responses to expectations of news, speculator reactions to real news, and investor profit-taking. The two former “because” 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 standout!  Mutual Fund unit holders infrequently take profits but usually take losses. Also, the new breed of Index Fund Wagerers is ready for reality to smack up alongside the head. Thus, if this brief little hiccup becomes extensively more serious, new investment opportunities will be abundant!

Here’s a list of ten things to think about doing, or avoid doing, during stock market corrections of any magnitude: 

First, Your current Asset Allocation should be tuned in to your long-term goals and objectives. Resist the urge to lower your Equity allocation because you expect another fall in stock prices. That would be an attempt to time the market, which is (rather apparently) impossible. Asset Allocation decisions should have nothing to do with stock market corrections.

Second, Take a look at the past performance. There have never been stock market corrections that have not proven to be a buying opportunity, so start collecting a diverse group of high quality, dividend-paying, Nifty 50 companies as they move lower at price. I start shopping at 20% below the 52-week high water mark stocks… the shelves are starting to become full.

Third, Don’t collect that “smart cash” you collected during the last rally, and don’t look back and get yourself agitated because you might buy some problems too soon. There are no crystal balls and no place for hindsight in an investment technique. Buying too soon, in the right portfolio percentage, is nearly as essential to long-term investment success as selling too soon is during rallies.

Fourth, Take a look at the future scopes. Nope, you can’t tell when the rally will come or how long it will last or when will it fall. If you are buying quality equities now (as you definitely could be) you will be able to love the rally exact more than you did the last time… as you take yet another round of profits. Smiles broaden with each newly learned gain, particularly when most Wall Streeters are still just scratchin’ their heads.

Fifth, As (or if) the stock market corrections continue, buy more slowly as opposed to faster, and specify new positions incompletely. Hope for a quick and steep decline, but prepare for a long one. There’s more to Shop at The Gap than meets the eye, and you run out of cash well before the new recovery begins.

Sixth, Your understanding and usage of the Smart Cash concept have proven the wisdom of The Investor’s Creed (look it up). You should be out of cash while the market is still correcting… it gets less risky each time. As long your cash flow continues unabated, the difference in market value is merely a perceptual issue.

Seventh,  Remark that your Working Capital is still growing, in spite of falling prices, and review your holdings for opportunities to average down on cost per share or to increase yield (on fixed income securities). Discuss both fundamentals and price, lean hard on your experience, and don’t force the issue. 

Eighth, Identify new buying possibilities using a consistent set of rules, rallies or stock market corrections. On that path, you will always know which of the two you are dealing with in the viciousness of what the Wall Street propaganda mill spits out. Focus on value stock shares; it’s just more comfortable, as well as being less risky, and better for your peace of mind. Just think where you would be today had you heeded this suggestion years ago…

Ninth, Analyze your portfolio’s performance: with your asset allocation and investment objectives absolutely in focus; in terms of market and interest rate cycles as fought to calendar Quarters (never do that) and Years; and only with the use of the Working Capital Model (look this up also), because it permits for your personal asset allocation. Remember, there is actually no single index number to use for comparison purposes with a properly developed value portfolio.

Tenth, So long as everything is down, there is nothing to stress about. Downgraded (or simply lazy) portfolio holdings should not be dumped during general or group-specific weakness. Unless of course, you don’t have the fearlessness to get rid of them during rallies… also general or sector special. 

Also Read: Do You Pay Yourself?


stock market corrections (of all types) will vary in depth and duration, and both characteristics are clearly visible only in institutional-grade rearview mirrors. The short and deep ones are most lovable (sort of like men, I’m told); the long and slow ones are more challenging to deal with. Most recent stock market corrections have been short ( March, April, and May and still continue) and challenging to take advantage of with Mutual Funds.

So if you overthink the circumstances or overcook the research, you’ll miss the party. Unlike many things in life, Stock Market realities must be dealt with fast, decisively, and with zero hindsight. Because amid all of the anticipation, there is one indisputable truth that reads equally well in either market direction: there has never been a stock market corrections/rally that have not succumbed to the next rally/correction.

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