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Finance: Keep calm, and invest on

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PHUKET: Stock market corrections don’t come often, but when they do, they tend to come on fast and cause investors (along with the media) to panic. After all, it’s not uncommon to experience a double digit portfolio loss in a matter of weeks, or even over the course of just a few trading days.

However, taking the following things into consideration will help you survive a stock market correction.

ASSESS YOUR PORTFOLIIO AND YOUR RISK

All investments come with some form of risk but if you have a long term time horizon, you will be able to weather any stock market correction. Nevertheless, you will want to make sure that your portfolio is not overexposed to any sector or asset class that might be falling more than the market average.

AVOID MAKING HASTY DECISIONS

Stock market corrections, along with crashes and bull markets, are all part of the normal market cycle and there is little that you as an individual investor can do to avoid them – short of exiting the market all together. A well-constructed portfolio that’s periodically rebalanced will help you counteract most downturns in the market – meaning you can take a deep breath, sit back and largely do nothing until the market correction is over.

IT’S OKAY NOT TO BE FULLY INVESTED ALL THE TIME

Many investors, even professional money managers, wrongly believe that you need to be ‘fully invested’ at all times to avoid missing out on a bull market, or a sudden market rally. This is simply not true as cash is the best protection against a market correction. Moreover, you need to ensure that you have adequate cash reserves and overall liquidity to take advantage of the profitable opportunities that will inevitably appear during market corrections when high quality stocks become available at bargain prices.

HAVE A STOCK SHOPPING LIST READY

Except for stock market crashes, market corrections are the next best time to buy high- priced stocks as they come on sale. This means you need to have a ready list of high quality stocks along with acceptable price levels at which to buy them should their share prices fall to, or below, those prices. Right now, my market correction stock list contains several tech or Internet growth stock names like Alphabet Inc (NASDAQ: GOOGL), salesforce.com, Inc (NYSE: CRM), Palo Alto Networks Inc (NYSE: PANW) and Facebook Inc (NASDAQ: FB) as these types of stocks tend to trade at high P/E ratios in raging bull markets.

KNOW WHEN TO BUY

A stock market correction will not necessarily end overnight in another bull market (as the market may move sideways for a while) and so you do not want to rush right back in. Instead, let the correction settle a bit while the media continues to sow panic as that will be the best time to start to slowly move back into the market. Moreover, keep an eye on any buying data, or news about institutional investors and their market moves, as they tend to look at market corrections as buying opportunities and are likely to get back in when retail investors are still selling.

LISTEN TO THE MEDIA WITHOUT FOLLOWING THEIR ADVICE

While many financial advisors tell anxious investors to turn off the news during a market correction, a counterargument would be that the more doom and gloom predictions you hear could be a sign of a market that’s bottoming. Again, institutional investors who are managing pension funds, endowments and other large pools of money, rather than trading the market, are not basing their investment
decisions on what some ‘talking head’ on CNBC or Bloomberg is saying about the market.

Don Freeman, BSME is president of Freeman Capital Management, a Registered Investment Advisor with the US Securities Exchange Commission (SEC), based in Phuket. He has over 15 years’ experience working with expatriates, specializing in portfolio management, US tax preparation, financial planning and UK pension transfers. Call for a free portfolio review. Don can be reached at: 089-970 5795 or email: freemancapital@gmail.com.

— Don Freeman

 

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