What Are The Steps You Should Take Now Before the Coming Stock Market Correction?
You wake up in the middle of the night in a cold sweat. The stock market just dropped by 20% yesterday, and you were caught unprepared.
Don’t think this can happen to you?
Think again.
It happens with regularity. It’s part of our business cycle.
It happened October 19, 1987 when the DOW dropped 22.61%.
I remember it well. I was in graduate school at the time, and many of my classmates were planning careers on Wall Street before October 19. I think the battle cry was “Real Estate” on October 20….
Stock markets regularly correct, and the current stock market is overdue for a correction.
Did you know the current bull market is the 4th longest since 1929? Here’s the data:
Longest stock market runs without a 10% correction:
- January 1991 – October 1997 1,705 Days
- May 2003 – November 2007 1,132 Days
- August 1984 – October 1987 808 Days
- November 2011 – Present 716 Days
- January 1963 – June 1965 625 Days
Are you hoping the market just keeps going up? A rising tide lifts all boats, doesn’t it? Sooner or later, however, what goes up must come down, even the market.
Perhaps you’re hoping your money manager will do the right thing Maybe he will, and maybe he won’t.
Maybe you’re thinking you have more time before you need to act. After all, the market isn’t THAT overvalued. Surely, you have more time.
The problem is we don’t know what’s happening, and we will not know until AFTER something happens.
I wrote about being almost paralyzed during the 1999-2000 stock market bubble. Everyone, and I mean everyone, was so excited when the NASDAQ hit 5,000 on March 9, 2000. I remember talking to my Dad, and he said, “I don’t see this ending anytime soon.”
Little over one month later, the NASDAQ would close at 3,321 on April 14, 2000. That’s a drop of almost 35 percent! 35 percent!!! Can you imagine? The market then stabilized through August 2000 closing “up” at 4,206 on September 1, 2000.
The worst was over.
We survived.
It was going to be a soft landing.
Hardly. The NASDAQ would fall another 3,000 points before the pain ended.
As we sit here thinking about what happened in 2000, you are probably saying to yourself, “How could people let this happen? I would have been smarter. I would have ‘known’ that the market was going down, and I would have sold. ”
I doubt it.
At first, you believe that it will not be that bad, that we’ll have a soft landing. You’ll think the worst is over. You’ll tell yourself, “It’s going to get back to the highs and then I’ll sell.”
Then it gets worse.
The market keeps going down, and you start panicking, but you still have hope. “Maybe in a year, the market will be back to its high, and then I will sell,” you say.
Then it really gets bad. You can’t stand the pain anymore, and then you sell….right when the market hits bottom.
All of this pain is avoidable right now if you take action.
I am not saying you should get out of the market and sell everything. There is no need for you to panic, and there is no need to sell everything. I am saying there are simple, prudent, actions you should take, or hopefully already have taken, regardless of what the market does in the coming months. They are:
- Get Yourself Off Margin. Right now you are playing Russian Roulette if you are on margin. What happens if there is a 10% correction tomorrow and you have to sell some of your stock? You will be crushed. Sell enough stock immediately to clear your margin account. Have I convinced you yet? Well do you realize the interest rate for the most margin accounts is around 9 or 10%, so that’s very expensive speculation risk you are taking. You will sleep better once you take this step.
- Make Sure You Have Enough Cash. Many investors are either “all in” or “all out” of the market. Neither strategy is good. You have no room to maneuver if you are 100% invested when a correction happens. Market timing is virtually impossible if you are 100% out of the market, so your results will be muted. Always have some liquid assets instead. How much? Well that’s up to you, but I suggest it should be a material amount. You want liquid assets to live on for a year just in case you lose your job or have a financial emergency where you need cash. At least it will not be the double-whammy of selling stocks you don’t want to sell if you have liquid assets.
- Diversify Your Portfolio. Diversification is the only free lunch you get as an investor. This means you will not be hurt as much during corrections. For example, if you are heavily weighted in technology stocks, and they correct, you will be hurt more than if your portfolio is evenly distributed. I used to think diversification was having my money in several technology companies instead of one technology company when I started investing twenty years ago. It’s not. Spread your investments in several different industries, and make sure you don’t own too much of any one company. Some of your investments will win and others will not, so your portfolio’s weight in a given industry will change over time. You need to adjust appropriately.
The result of planning ahead:
The beautiful thing is you will be prepared whenever the inevitable correction happens. Amazingly, you will no longer fear market corrections. In fact, you will welcome market corrections. Now, because you are prepared, you can calmly and rationally plot your next move. The cash on hand will come in handy as you decide to buy great companies at bargain prices.
You can be this prepared person. Just start taking the steps today.
That’s all for now,
Brett
Photo: Depositphotos