Although corrections are a normal part of any market cycle, some investors find themselves in a vicious emotional cycle when asset prices are falling. Fear of losing money can lead to poorly planned decisions and costly knee-jerk reactions. The best way to prepare for a correction is to have an effective plan to follow, so that no matter what happens in the market or global economy, you still feel confident about reaching your financial goals. With a solid investment plan in place, you can be disciplined, better positioned, and check your emotions at the door when a correction comes.
Every market has regular pullbacks. Even since the lows in March 2009, the market has had nine corrections in the 6% – 22% range. Anyone with a long-term horizon should look at a pending correction as an opportunity.
Bloomberg market commentator Barry Ritholtz put it well in a recent article:
“Just because corrections are inevitable, doesn’t mean you should be complacent. Your levels of concern about a correction and your response should be a function of whether you are a trader or an investor.“
We are not traders. At JPH, we are investors with a focus on a longer-term time horizon, and that allows us to take advantage of market events that come along.
“Anyone with a longer-term time horizon should look at a correction as an opportunity. Use any market decline to rebalance adding to those asset classes that have fallen.”
While we know another correction is on the way (isn’t it always?), we don’t know when it will happen. That’s why having a long-term view and a plan in place beforehand is so important.