A correction is a good thing. It's just the other side of a rally, no matter how big or small it is. I've been told that, theoretically and even technically, corrections bring stock prices back to their true value or "support levels." In truth, it's a lot simpler than that. Prices go down when speculators react to what they think will be news, when speculators react to what is news, and when investors take profits. Because there is more "self-directed" money out there than ever before, the first two "becauses" are stronger than ever. And that's what makes correctional beauty so special! Unit holders in mutual funds rarely make money, but they often lose money. Chances are everywhere!
Here is a list of ten things to do or think about doing during corrections of any size:
- Your understanding of and use of Smart Cash has shown that The Investor's Creed is wise. While the market is still adjusting, you shouldn't have any cash. [Each time, it seems less scary.] As long as your cash flow stays the same, the change in market value is just a matter of how people see it.
- Keep in mind that your Working Capital is still growing even though prices are going down, and look at your holdings to see if you can average down the price per share or increase the yield (on fixed income securities). Look at both the fundamentals and the price, trust your experience, and don't try to force the issue.
- As (or if) the correction continues, buy less quickly and set up new positions in a half-way way. Hope for a steep and short drop, but be ready for a long one. Shop at The Gap is more than meets the eye.
- Look at the performance of your portfolio by keeping your asset allocation and investment goals in mind, looking at it in terms of market and interest rate cycles instead of calendar Quarters (never do that) and Years, and only using the Working Capital Model, which lets you set your own asset allocation. Remember that a well-made value portfolio doesn't have a single index number that can be used to compare it to other portfolios.
- Don't keep the "smart cash" you made during the last rally, and don't look back and get upset because you might buy some stocks too soon. There are no crystal balls, and you can't use what happened in the past to plan your investments.
- Your current asset allocation should have been based on your goals and objectives. Don't cut your stock allocation because you think stock prices will go down even more. That would be an attempt to time the market, which is obviously not possible. The expectations of the market have nothing to do with how assets should be spread out.
- Use a consistent set of rules, such as a rally or a correction, to find new buying opportunities. So, no matter what Wall Street's propaganda mill says, you will always know which of the two you are dealing with. Focus on value stocks because it's easier, safer, and better for your peace of mind. Just think about where you'd be if you'd listened to this advice years ago...
- Look ahead to what will happen. Nope, you can't know when or how long the rally will last. If you're buying good stocks right now, which you probably are, you'll enjoy the rally even more than you did the last time because you'll be able to take another round of profits. When most people are still scratching their heads, each new gain brings a bigger smile.
- Look back into the past. There has never been a correction that didn't turn out to be a good time to buy, so start buying a variety of high-quality, dividend-paying NYSE stocks as their prices go down. When I start shopping, the shelves are full and the 52-week high water mark is 20% below that.
Corrections (of any kind) vary in how deep they go and how long they last, and you can only see both of those things clearly in institutional-grade rearview mirrors. People tell me that the short, deep ones are the most loveable, kind of like men. The long, slow ones are harder to deal with. Most corrections are "45s" (August and September, 2005), which are hard to take advantage of with Mutual Funds. But despite all this uncertainty, there is one fact that can't be argued with: there has never been a correction that didn't end with a rally, which is the more popular flip side. So smile even when things are boring. Every day of the week, you might meet Peggy Sue the next day.
