I can tell you without a doubt that there will be a correction and a great buying opportunity in the stock market. This will happen and the question is not if but when. A stock market correction is defined as a drop of 10 percent or more from peak valuations. Market corrections are healthy and happen more often than you think. Over the history of the markets, corrections occur every 18 months on average and last on average 3-4 months.
What defines a good investor from an average investor is the way each reacts to declining stock values. How are they prepared to handle the decline in portfolio value? I can tell you in the last 20 years of helping people invest that panic selling at the wrong time will not only put a dent in your portfolio but also in your confidence. You need to have a strategy in place to deal with the volatility that comes with a market correction. Raising some cash and building your portfolio to withstand a correction is something that should be done before this happens. It will be difficult to raise cash after the fact, by then it’s too late. You need to be preparing now. I am not telling you to go out and sell everything. I am saying that trimming some overvalued positions would be a prudent strategy at this time. We always take a look at the tax situation of each and every client prior to selling any security. You would be wise to do the same. If it’s an IRA or qualified account this will not matter.
There is an old adage that says “Sell in May and Go away”. Well, it’s May, and the market is sitting at all-time highs. The next move in the market could be 10 percent up or 10 percent down. It seems like no one remembers the beginning of 2016 when we had our last correction that bottomed on February 11, 2016. I remember it well. There was some panic and there were bad decisions made by investors. The point of this article is to remind everyone that greed drives the market up and fear drives it down. To me, it looks like we are approaching a short term top that could provide some great buying opportunities. It’s important not to get caught up in euphoric buying and also not to panic sell. You need to always have a strategy when it comes to investing. Write it down and memorize it, but always refer back to it before making any investment decision. If your portfolio is designed to meet your risk tolerance, a correction won’t faze you when it comes to your long term goals and objectives. Review your portfolio. Assess the risk and adjust it to your comfort level. This will save you money and you will lose less sleep knowing you have the correct strategy in place. Do your homework before investing and consult a Certified Financial Planner™ before investing in anything you are unsure of or do not understand. Please call us at (772) 223-9686 if you have any questions or would like a free portfolio review.