A correction is a beautiful thing, simply the flip side of a rally, big or small. Theoretically, even technically I'm told, to adjust equity prices to their actual value or "support levels" corrections. In reality, it's much easier than that. Prices go down because of speculator reactions to expectations of news, speculator reactions to actual news, and investor profit taking. The two former "because" are more powerful than ever before because there are more "self directed" money out there than ever before. And therein lies the core of correctional beauty! Mutual fund unit holders rarely take profits but to take. Often lose Opportunities abound!
Here is a list of ten things to do and think about doing during the correction of some size / or after:
1. Your present Asset Allocation should be tailored to your goals and objectives. Resist the urge to decrease your Equity allocation because you expect a further decline in stock prices. That would be an attempt to reduce the time of the market, which is (of course, in place) are impossible. Proper Asset Allocation has nothing to do with market expectations.
2. Take a look at the past. There has never been a correction that has not proven to have been a buying opportunity so start collecting a diverse group of high quality, dividend paying, NYSE companies as they move 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 you get restless because you can buy some issues too soon. There are no crystal balls, and no place for retrofit into an investment strategy.
4. Take a look at the future. Nope, you can not tell when the rally will come or how long it will last. If you are buying quality equities now (as you certainly could be) you will be able to hold the rally even more than you did the last time ... if you have a round of profit. Smiles broaden with each new realized gain, especially when most people are still head scratchin '.
5. If (or when) 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. Before There is more to shop at The Gap than meets the eye.
6. Your understanding and use of the Smart Cash concept has proven the wisdom of The Investor's Creed. You must be out of cash while the market is still correct. [It is becoming less scary every time.] As long your cash flow continues unabated, the change in market value is merely a perceptual problem.
7. Note that your capital is still growing, despite falling prices, and examine your holdings for opportunities to average down on cost per share or to increase (on fixed income) yield. Examine both fundamentals and price, lean hard on your experience, and not force the issue.
8. Identify new buying opportunities using a consistent set of rules, rally or correction. That way you always know which of the two you are dealing with in spite of what the Wall Street propaganda mill spits. Focus on value stocks, it's just easier, but also less risky, and better for your peace of mind. Just think where you would be had you this advice years ago ... now
9. Examines the performance of your portfolio: with your asset allocation and investment objectives clearly in focus, in terms of market and interest rate cycles as opposed to calendar Quarters (never do that) and Years, and only with the use of the Working Capital Model, because it allows for your personal asset allocation. Remember, there really should be used for comparison with a well-designed portfolio value. No index number
10. Finally, ask your broker / advisor why your portfolio has not yet surpassed the levels it boasted five years ago. If it has, thanks and continue with what you've done. This is like golf, if you get a better score than the reality, you will end up losing money.
11. Another thought to consider. As long as everything is down, there is nothing to worry about.
Corrections (of all types) will vary in depth and duration, and both characteristics are clearly visible only in institutional grade rear view mirrors. The short and deep ones are most lovable (kind of men, I'm told), the long and slow ones are more difficult to treat. Most of the corrections are "45s" (August and September, '05), and difficult to take advantage of with Mutual Funds. But amid all this uncertainty, there is one indisputable fact: there has never been a correction that has not succumbed to the next rally ... the more popular side. So smile through the hum drum Everydays the correction, you might meet Peggy Sue tomorrow.
Steve Selengut
Professional Investment Portfolio Manager since 1979
BA Business, Gettysburg College, MBA Professional management, Pace U.
Author of: "The Brainwashing of the American Investor:?? The Book that Wall Street does not want you to read, and A Millionaire's Secret Investment Strategy?
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