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How to Survive a Stock Market Correction.


 

The Dow Jones Industrial Average continues to ascend to new heights.  The higher the market climbs, the more noise you’ll hear about a stock market correction.  At some point those calling for a market correction will be right.  Stock market corrections are typical and occur about every three to five years.   A bear (down) market will last about 18 months while a bull (up) market will run for about 8 years.[1]

 

How can you protect yourself against a bear market attack?

 

1.       Don’t panic! A market drop is normal, painful, but normal.

 

2.       Don’t make any changes to your portfolio during the initial phases of the market correction. Let the market find its footing before you make any major adjustments to your account.

 

3.       Cash is king.  If you have a cash cushion, you’re less likely to make rash decisions regarding your stock holdings.   How much money should you keep in cash?  My recommendation is for you to hold two to three years’ worth of expenses in cash.  If your annual expenses are $50,000, then your cash amount should be in the range of $100,000 to $150,000.

 

4.       Diversify your assets.  A balanced portfolio of stocks, bonds, cash and alternative investments will help cushion the blow from a market drop. During a market drop it’s likely your bonds will perform well.  During the 2008 market mauling long term U.S. government bonds rose 25.9%.[2]

 

5.       Rebalance your portfolio.  By rebalancing your portfolio, you’ll take advantage of lower stock prices.  Rebalancing will allow you to keep your risk level and asset allocation in check.

 

6.       Eliminate your margin balance.  A sure way to lose more than you intended is to use leverage.  If you’ve tapped the margin in your account to buy securities, I would encourage you to eliminate it entirely.   The best way to make a bad situation worse is to employ margin in a down market.

 

7.       Stay invested.   The two days following the stock market crash of October 19, 1987 the Dow Jones Industrial Average rose 16%.  Despite the dramatic drop of Black Monday, the Dow ended 1987 with a gain and has since risen 1,100%.

 

8.       Look for bargains.  Is it possible your favorite stock is now 25% or 50% cheaper?  If you’re not sure what to purchase, focus on a broad-based index fund.   An index fund will allow you to gain market exposure with the click of your mouse.

 

9.       Think long term.  A bear market lasts about 18 months.  It’s likely you’ll own your investments for years, maybe decades, before you need the money.   Thinking generationally will help get you through the dark days of a market downturn. 

 

10.   Markets recover.  The stock market has always recovered – always!  The Dow is currently trading near its all-time high.

 

11.   Have fun.  The market will go up, down and sideways long after we’re gone.  Instead of marinating in a stew of worry get outside and enjoy your friends, family and hobbies. 

 

Stock market corrections come and go.  The market is a long-term wealth creation machine that is occasionally interrupted with a pullback.  If you stick to these tips, you’ll have an opportunity to benefit from the stock markets long term performance.

 

Even though I walk through the darkest valley, I will fear no evil, for you are with me; your rod and your staff, they comfort me.  ~ Psalm 23:4.

 

Bill Parrott is the President and CEO of Parrott Wealth Management, LLC.   For more information on financial planning and investment management, please visit www.parrottwealth.com. 

 

March 10, 2017

 



[2] Dimensional Fund Advisors 2016 Matrix Book.

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