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Don’t panic

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In the face of the typhoon (market correction), bend like bamboo

What is it about market corrections? Wise, rational people can become wide-eyed pessimists and conduits of fear in the face of steep market drops. Can you remember a time when you sold investments during a market correction and it turned out to be a wise move?

Investors ruled by a forest fire of emotions, fanned by the media looking to report the latest, most sensational story, rarely make wise decisions. Often, when the market is hitting new record after new record, they’re buying. But when the market turns the other way, and suddenly high quality companies are on sale and can be bought at excellent discounts, emotion-ridden investors are running for the hills or putting their heads in the sand.

Here are some facts that you’d do well to pay attention to. The study tells the sad tale of how investors, suffering from a bad dose of “Oh, no! The world’s going to end!”, make some classic mistakes while investing. In fact, what may be the most important aspect of your investment plan, after asset allocation, is dealing with the forces of rampant negativity that rear their ugly heads every time there’s a market correction.

Glued to the media, wide-eyed and beset with your worst fears for the economic future? It’s time to go for a walk. Fund managers wait for corrections to go out bargain hunting. Wouldn’t you be happy if the suit or new pair of shoes you wanted to buy were now on sale? Because that’s exactly what’s going on now: high quality, dividend-paying companies are on sale.

Investors need to do themselves a favour:

  • Develop a thicker skin
  • Stop dwelling on the investment media during corrections
  • Stop chasing investment returns
  • Ask yourself: since everybody’s talking about gold bullion (or whatever the flavour of the month is) right now, do I really want to buy it?
  • Get a sound investment plan
  • Stick to your plan
  • Buy or sell investments when your asset allocation veers away from your planned allocation, and do it regularly
  • Remind yourself that great, stable companies are not going to disappear

Further considerations that you should bear in mind:

  • Remind yourself that Warren Buffett (and other smart money managers) are looking for bargains rather than making rash, panic-fuelled decisions
  • Aren’t all the companies you wanted to buy when they were more expensive, cheaper now?
  • The economy’s gone through corrections dozens of times before – this won’t be the last time (e.g., Latin American bonds, the Asian Crisis, the Tech bubble, 9/11, [Remember when people were talking about the Canadian peso?], the financial crisis, etc.)
  • If you’re buying in the midst of this correction, or any, remember, you don’t need to throw all your money in at one time – you can also buy gradually, giving you a cushion and better prices should the market go down further
  • There’s a place in your portfolio for bonds – do you have any?
  • Revisit your plan yearly

If you’re still spooked after a hard, meditative look at your investments, maybe your asset allocation is too aggressive. Should you reduce your equity holdings somewhat? Reducing stock holdings amidst any correction is tricky. You’re probably going to be selling at the worst of possible times – maybe you should revisit your asset allocation model when things calm down a bit? (Have I mentioned stick with your plan and re-evaluate your plan regularly?)

The time for strategic thinking is before a correction and during one. When it seems that investment losses are falling out of the sky, too many investors forget their planning. Many have heard Warren Buffett’s “Be greedy when others are fearful” philosophy – slowing down and taking a breath during the bad news feeding frenzy will help give you some perspective on where you’ve been, where you’re at now and where you want to be.

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