How to Respond to a Market Correction  

Stock Market CorrectionEveryone wants their nest egg to steadily grow, providing a financial cushion for the future. There are times that growth is more of a dance with a few steps forward, followed by a step back. Market correction is inevitable and though it does not happen on a regular basis (making it difficult to predict) it will happen. A market correction is defined as a market drop of 10 percent or more. According to the Stock Trader’s Almanac, approximately 17 months transpires between corrections. We have been earning on borrowed time. Market corrections might require a reevaluation of your portfolio and investments. Learn how to safeguard the bulk of your investments when you respond to a market correction with the following suggestions:

  1. Lay out a strategic plan within your long-term written Investment Policy Statement (IPS). Include what will happen when there is a market correction or periods of volatility. This will enable your financial advisor to proactively move to rebalance your strategic allocations to their targets.
  2. During periods of volatility, it is necessary to review and rebalance your investments. Rebalancing is a typical move within a given portfolio. Diversification helps to balance out your portfolio and makeup a shortfall in one area with growth in another. Review your mix of assets and your tolerance for risk. You should accept that a certain amount of volatility is normal for your portfolio.
  3. Portfolios will recover faster once the selling is done. A volatile market makes for these unique opportunities. With lower stock prices, you will be able to get more shares of your equity funds (or individual stocks) and add them to your portfolio.
  4. Those who delegate to professionals who actively manage their portfolio can ride the crest of volatility. It is difficult to know when to get out and when to get in. A rebalancing strategy makes those decisions clearer. As mentioned earlier, understand what losses you can tolerate and what is typical for your overall holdings.
  5. Act, do not react. Sam Stovall, chief stock strategist at S&P Capital IQ, says “Don’t become your portfolio’s worst enemy by allowing yourself to get caught up in the negative hysteria.” Times like this are what you have prepared for within your long-term strategy. This is why you are diversified, have an IPS and non-equity asset classes, which allows you an opportunity to buy equities at lower prices.

Detail Your Market Correction Strategy

Market corrections are par for the “investment” course. Your IPS requires a thorough description of how to respond to significant drops in the market.  (See previous article on Investment Policy Statements.)  The Windsor Group, Ltd. partners with clients to decide how to respond and reallocate investments and evaluate your risk during episodic, volatile periods. Discuss your strategy with the experts at The Windsor Group, Ltd. before the next market correction. Contact an experienced Windsor Group wealth management planner at 317.848.3005 or 800.678.1078 to determine the best course of action.