Magazine article Risk Management

Dealing with Market Corrections

Magazine article Risk Management

Dealing with Market Corrections

Article excerpt

A correction is a beautiful thing--simply the flip side of a rally, big or small. Theoretically corrections adjust equity prices to their actual value or "support level." In reality, it is much easier than that. Prices go down because of speculator reactions to expectations of news, speculator reactions to actual news or investor profit taking. The two former "becauses" are more potent than ever before because there is more "self-directed" money out there than ever before. Therein lies the core of correctional beauty. Since mutual fund unit holders rarely take profits but often take losses, opportunities abound.

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

1. Your present asset allocation should be tuned into your 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 impossible. Proper asset allocation can not rely on market expectations.

2. Take a look at the past. There has never been a correction that has not proven to be a buying opportunity, so start collecting a diverse group of high quality, dividend-paying NYSE companies as they lower in price. I start shopping at 20% below the 52-week high water mark, and the shelves are full.

3. Do not hoard that "smart cash" you accumulated during the last rally, and do not 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.

4. Take a look at the future. You cannot tell when the rally will come or how long it will last. If you are buying quality equities now you will be able to love the rally even more than you did the last time ... as you take yet another round of profits. Smiles broaden with each new realized gain, especially when most people are still scratching their heads.

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.

6. Understanding and using the "smart cash" concept has proven the wisdom of the investor's creed. …

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