A correction is a beautiful thing, simply the flip side of a rally, big or small. Theoretically, even technically as I would say, exemptions adjust equity prices to their true value or “support level”. In fact, it’s a lot easier than that. Prices dropped due to the speculator’s reactions to the expected news, the speculator’s reaction to the real news, and investor profit taking. The two former “causes” are stronger than ever because there is more “self -management” money out there than ever before. And here lies the core of the beauty of correction! Mutual Fund unit owners rarely make a profit but often lose a loss. Many times!
Here is a list of ten things to do and / or to think about when making corrections of any size:
1. Your current Asset Giving should be focused on your goals and objectives. Resist the urge to reduce your Equity allocation because you expect further fall in stock prices. That’s an attempt to prepare for market time, which is (obviously) impossible. Proper Asset Delivery has nothing to do with market expectations.
2. Look at the past. Never before has there been a correction that has not been proven to be an opportunity to buy, so start collecting a variety of high-quality, dividend-paying, NYSE companies as the price moves. I started buying 20% off the 52 week high water mark, and things were full.
3. Don’t hide that “smart cash” you accumulated at the last rally, and don’t look back and panic because you might have bought some issues right away. There are no crystal balls, and there is no place for looking at an investment strategy.
4. Look to the future. No, you can’t tell when the rally will come or how long it will take. If you buy quality equities now (as much as you can) you may love the rally more than you did last time … while you also get another profit. Smiles smile at every new realization gained, especially when most people haven’t voiced it yet.
5. As (or if) the correction continues, buy more slowly as opposed to more quickly, and build non-new positions. Hope for a short and steep decline, but prepare for a long one. There’s more to Shopping at The Gap than meets the eye.
6. Your understanding and application of the Smart Cash concept attests to the wisdom of The Investor’s Creed. You should be out of cash while the market is fixing. [It gets less and less scary each time.] As long as your cash flow continues unabated, fluctuations in market value are just a mental issue.
7. Remember that your Working Capital continues to grow, despite falling prices, and check your holdings for opportunities to average the value per share or to increase yield (in fixed security securities) . Check the same standard and price, trust your experience, and don’t force the issue.
8. Identify new buying opportunities using the same set of rules, rallies or corrections. That way you’ll always know which of the two you’re dealing with no matter what the Wall Street propaganda factory spits out. Focus on value stocks; it’s much easier, as well as less risky, and much better for your peace of mind. Just imagine where you are now when you heard this advice last year …
9. Examine what your portfolio is doing: with allocating your assets and investment objectives clearly focused; about market cycles and interest rates as opposed to calendar Quarters (never do that) and Years; and only to use the Working Capital Model, because it allows you to allocate your own assets. Remember, there is never a single index number that can be used for comparison purposes with a properly designed portfolio value.
10. Finally, ask your broker / advisor why your portfolio has not yet surpassed the levels boasted five years ago. If you have it, thank you and keep up the good work. It’s one like golf, if you claim a better score than you actually are, you lose money.
11. Another thought to be considered. Until everything collapses, nothing to worry about.
Corrections (all different) vary in depth and duration, and the same properties are clearly visible only in institutional grades in the rear mirror. Short and deep ones are the most loved (unlike men, I’m told); the long and slow are more difficult to deal with. Most of the corrections are “45s” (August and September, ’05), and are difficult to take advantage of in Mutual Funds. But amid all the uncertainty, there is one indisputable fact: there has never been a correction that has not won the next rally … the more famous part of the flip. With that smile through the hum drum Everyday to correct, you’ll just meet Peggy Sue tomorrow.