It looks like we are facing a stock market correction.
That’s not surprising, there is always a correction around the corner.
It would be a new world if the stock market didn’t have a tendency to correct and crash.
So however clever we think we are, however astute our investing or for that matter lucky, we will get a blow to the financial temple from time to time.
If you look at the chart you can see that you should expect a rough ride at least once a year but sometimes its more.
Sometimes its not a slump, it’s a crash.
So what should an investor do.
Here are five tips.
Decide whether it’s a Crash or correction.
Rule 1 of corrections is to answer the big question. Is this a crash or just a correction. A crash tends to need a big reason for its occurance. The dotcom crash was a clear bubble. The credit crunch crash was caused by the freeaing up of the massive credit markets. It noirmally needs something massive to make a true crash. If you think we are in such a dynamic bail. Otherwise hold it will work itself out. You can clearly see this in 2008 and 2011. If you held in 2008, it was definitely a hard thing to come back from. 2011 however healed so by today, bailing out then would not have made no difference to a braod portfolio holder. I know because I bailed both times.
Do not panic.
The key to corrections and even crashes is not to panic. Panic is what costs you money. Crashes very seldom strike in a moment from a blue sky. The moment tends to start with a period of bearishness. So at this point the thing to do is look at all your investments and make a simple judgement call. Sell or hold. Lightening up before a correction is good practice if some winners profits loom to large. Going to cash in a measured way is good practice.
Buy the flaming dip.
The key to buying a crash or correction, is to take it slow. The slump will not be over overnight. Let the slump settle, wait till the media is telling you how the dream is over. Then roll back in gently.
Buying a crash is wonderful. If you can be in cash for that tumble you are smiling all the way to the back for the next year or two. However that’s a hard trick to pull off and it takes nerves of steel to do it. I recall shouting at a CNBC host who didn’t like me saying on air there was panic in the market at the bottom of 2008s crash. He didn’t understand I was therefore going really long. It a pretty basic idea when you think about it, but hard to follow if you are a momentum trader.
Stake out your targets in advance.
Don’t leave it till the crash to go looking for companies to buy. Have the names and the price targets on a spreadsheet waiting to trigger. Put in alerts on your favourite stock websites. I use ADVFN/ihubs alerts system to email me when my stocks come due for buying. Most people wait for the next bandwagon to roll to jump on but that’s not the only way to invest. Let the market serve up opportunities to you in a correction. The one thing to know is the bigger the crash the great the profits from buying the aftermath.
Look out for mad.
Keep an eye out for mad opportunities. In a slump and especially a crash, crazy situations arise. Don’t be over eager but keep your eyes open for boring stocks suddenly falling insanely. Keep clear of the controversial just try and spot, Off the beaten track stocks turning into special situations. Corrections and crashes create these investment opportunities and it’s a good idea to snaffle up lots of them in small amounts when you see them and leave it to the recovery to sort out.
We all hate the prospect of a slump or a crash but in fact they are little gifts to long term investors. While the crazy speculators get toasted, savvy people get to buy stock at knock down prices.
So here is to the coming summer sale. Good luck.