One of the most fear inducing experiences in your investment journey will be a stock market correction. When the general consensus turns from greedy to fearful, volatility can reach incredible heights and induce even the most determined investors to panic. Emotionally driven markets are a scary place to be in. Both greed and fear might make you succumb to make foolish decisions that ultimately can impact your wealth. It is important to keep in mind that you should not invest what you are not willing to lose.
What Can Drive Stock Market Corrections?
There are many reasons that drive stock markets to crash. Either a piece of news that frightens investors worldwide, like we have seen with Corona. It can also happen that when prices and expectations for stocks are too high, the market simply adjusts prices according to a lower expected growth. More important than understanding what can drive prices down is understanding what you can do about it.
Focus on your Strategy
Your investing strategy and plan should be on your mind at all times. This prevents you from making rash decisions that are not in line with your goals. If stock prices start crumbling down, don’t stress. Instead focus on the stocks you own, and why you thought they would be good investments at those prices. If they were good investments at the price you paid for them, they are probably being offered at a discount. That should be an exciting thing, and induce panic buying. But instead most investors are induced in panic, and led to believe they will lose most of their investments. If there is a great time to buy stocks is when their prices go down.
Buy Low
If you buy low the downside is much smaller than what you think. Focus on the value of the individual business behind the stock and you will do fine as an investor. Corrections happen more often than you think, and should be embraced by investors. It allows you to purchase some of your stocks at lower prices, and eventually buy other stocks you initially thought were expensive. If you buy value stocks, or stocks that are fairly valued. You ultimately protect your investment and even if the price slides, the value you paid for the stock is there. This shows how important it is to focus on valuations, and being able to accurately value stocks.
Asset Allocation
The corona induced panic, shows how investors can dismiss all of their long term goals in an instant. The widespread fear that riddled the markets affects even the most disciplined investors. With this in mind it is still important to consider what to do. Some readjustments to your portfolio may be required depending on what happens. Let’s analyze for instance the corona pandemic. It affected many industries around the world. If you were holding a large portion of your portfolio in stocks related to airlines, hotels, cruises or restaurants. You should have perhaps adjusted your holdings accordingly. Since the disruption felt across those sectors would eventually put those companies at risk.
Final Take
Corrections are normal and healthy in a functioning market. They shouldn’t deter you from sticking to your investment plan and goals. Always try to stay true to your beliefs and avoid getting emotional. That is when most of the mistakes can happen. Follow your predetermined strategy and try to see corrections as a great way to load up on your favorite stocks. Remember what Warren Buffett said – “Be greedy when others are fearful, and be fearful when others are greedy”
