I see any correction as wonderful event, like Christmas arriving early. Getting a correction into the right perspective, it is after all just simply the opposite side of a rally whether its big or small.
In theory all that corrections do is adjust share prices to their literal value or recent“support levels”. In fact, it’s much easier than that. Stock prices go downwards depending on a traders reactions to unrealistic expectations of news or speculative reactions to actual news. Plus stocks also decline when there is either profit taking or panic selling.
Here’s a list of ten things you can do and/or might want to think about doing during any corrections that will no doubt again occur ithe future.
1.Your present Stock Allocation should have been previously attuned to your preset goals and profit objectives. Now is the time to resist the urge to decrease your Stock allocation just because you expect a further fall in stock prices. That would indeed be a futile attempt to time the market, which is as we know relatively impossible. Proper Stock allocation has nothing whatsoever to do with market expectations.
2.If you take a look at the past you will notice that there has never been a correction that has not proven to be a buying opportunity.So what you need to do in preparation for the next correction,is to start collecting a diverse group of high quality, dividend paying companies as they begin to move downwards in share price. I start seriously looking at these when they reach 20% below the 52-week high water mark until my list is completely full.
3.Don’t hoard up those profits you accumulated during the last rally, and don’t look backwards and get yourself upset because then you just might go and buy some stocks too soon. Remember that there are no crystal balls, and there is definitely no place for hindsight in any successful investment strategy.
4.So don’t try to predict the future either because you can’t tell when the rally will come or how long it will last for.
5.As the correction continues, buy more slowly as contrary to buying more quickly. We all hope for a short and steep decline, but all the same it pays to be prepared just in case its a long one.
6.You should be out of capital while the market is still correcting. As long your cash flow continues uninterrupted, the change in market value is simply a perceptual issue.
7.Note that your Working Capital is still growing, in spite of falling prices, and remember to regularly examine your portfolio for opportunities to average down on cost per share.
8.You can identify new buying opportunities by using a consistent set of rules be it either a rally or a correction. That way you will always know which of the two you are dealing with in spite of what the Stock market propaganda machine churns out.So always focus on value stocks; it’s a lot easier as well as being a lot less risky. Just think where you would have been today had you heard this advice years ago.
9.Always continually examine your portfolio’s performance: with your stock allocation and investment objectives clearly in mind.
10.One more thought to consider.So long as everything is down,there is nothing to really worry about.
In finishing, remember that corrections will always vary in depth and duration. The short and deep ones are the most profitable while the long and slow ones are much harder to deal with..
But amidst all the doom and gloom there is one incontestable fact: there has never been a correction yet that has not yielded to the next rally. So with that in mind, roll on the next correction.
Chris Strudwick is a successful share trader on the Australian Stock Market Visit his weblogs at both http://www.asxnewbie.com AND http://www.aussie-retiree.com/ for more free articles and useful information about the stock market.
