10 Things To Do – Or To Avoid Doing – During A Market Correction

“…When any…market hiccup grows into a major meltdown, new investment opportunities always become abundant…Below is a list of 10 things to think about doing, or to avoid doing, during corrections of any magnitude.”

Prepared by Lorimer Wilson, editor of munKNEE.com – Your KEY To Making Money! 

[Editor’s Note: This version* of the original article by Steve Selengut has been edited ([ ]), restructured and abridged (…) by 44% for a FASTER – and easier – read. Please note: This complete paragraph must be included in any re-posting to avoid copyright infringement.]

“1. Your present Asset Allocation should be tuned in to your long-term goals and objectives.

• Resist the urge to decrease your equity allocation because you expect a further fall in stock prices. That would be an attempt to time the market, which is (rather obviously) impossible.

Asset Allocation decisions should have nothing to do with stock market expectations; they should be tuned in to long-term goals and objectives, retirement income even.

2. There has never been a correction that has not proven to be a buying opportunity.

• Start collecting a diverse group of high quality, dividend-paying, NYSE companies as they move lower in price…

I start shopping at 20% below the 52-week high water mark, and the bargain bins are filling.

3. Don’t hoard that “smart cash” you accumulated during the last rally, and don’t look back and get yourself agitated because you might buy some issues too soon.

• There are no crystal balls, and no place for hindsight in an investment strategy.

Buying too soon, in the right portfolio percentage, is nearly as important to long-term investment success as selling too soon is during rallies. “Smart Cash” = dividends + interest + realized gains

4. …You can’t tell when the rally will resume or how long it will last.

• If you are buying quality equities now…you’ll be able to love the next rally even more than you did the last one as you take yet another round of profits.

Smiles broaden with each new realized gain, especially when most Wall Streeters are still just scratchin’ their heads about what to do, well into the upturn.

5. As (or if) the correction continues, buy more slowly as opposed to more quickly…

• 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, and if you are doing it properly, you’ll run out of cash well before the new rally begins.

6. …Add selectively to positions that will help grow the income portion of your portfolio best.

• Make this an active management function, as opposed to some form of automatic ritual. The objective should be to grow the income as much as possible while prices are weak.

Rarely, even in our three major meltdowns, did investment grade value stocks cut their dividends; closed-end income funds likewise…[As] long as your cash flow continues unabated, the change in market value is merely a perceptual (and emotional) issue and you will have the means to benefit from it.

7. …Examine your holdings for opportunities to average down on cost per share or to increase yield…

• “Working capital” is simply the cost basis of all securities and cash in the portfolio. If you use this number, instead of market value, in your allocation and diversification decisions, you will never have to rebalance positions again. You’ll be able to keep the asset allocation on track with each investment decision you make.

8. Identify new buying opportunities using a consistent set of rules…

• …Focus on investment grade value stocks…
• Never buy
  • a stock that doesn’t pay a dividend,
  • a new issue
  • or any security that does not have total liquidity.
• They are, by their very nature, more speculative than most of us need to be.

9. Examine your portfolio’s performance with your asset allocation and investment objectives clearly in focus…

• Today’s average yield on a well-diversified basket of income, equity, and tax-free closed-end funds, REITs, and MLPs is somewhere between 8.5% and 9%, after all fund expenses…

With this kind of buying opportunity waiting for you, almost any profit becomes a reasonable one…

10. …[As] long as everything is down, as it is now, there is nothing to worry about.

• Downgraded (or simply lazy) portfolio holdings should not be discarded during general or group specific weakness…
• Rallies are the time to take losses on things that aren’t doing their job…

In Conclusion

…If you overthink the environment or overcook the research, you’ll miss the party. Unlike many things in life, stock market realities need to be dealt with quickly, decisively, and with zero hindsight because, amid all of the uncertainty, there is one indisputable fact that reads equally well in either market direction: there has never been a correction/rally that has not succumbed to the next rally/correction…”

(*The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.)

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