Three Guaranteed Ways to Win (and Lose) During This Market Correction

Even the most seasoned investor has been tested over the last few months. During market upturns, investing is a simple process. Portfolio values increase, and investors are a happy, if complacent bunch. But, the opportunities in the stock market are not without risk, the primary of which is a systemic market correction. There are common themes that are heard time and time again during these corrections, and I feel fortunate that I entered the banking business during the depths of the correction in the 1970’s, and remember hearing similar things then as now.

It’s different this time

This is unlike previous corrections because…blah, blah, blah. Every market correction is different, obviously, because no two occur with identical financial circumstance. There are, however, similarities which include panic selling, increased volatility (which is just a description of the depth and the height of price swings) and the decrease in company earnings that accompany a recession.

Go to cash

That is the perfect advice if, and only if, you possess two vital skills

1. The ability to predict a market downturn before anyone else does, and
2. The ability to predict a market upturn before anyone else does.

Those market pundits who tout their superior forecasting skills by showing that they predicted this downturn and sold all their stock last year must now “call the bottom” of this correction and reinvest their money before the upturn. There are trillions of dollars in money market funds being held “on the sidelines,” consisting of people who sold in a panic as well as those who are hesitant to buy now. This extraordinary amount of cash will push the market up quickly when it is reinvested, and missing that upturn will likely result in foregoing the majority of the profit the market will enjoy in its turnaround. Who has successfully and consistently predicted market movements in both directions?

No one. So smart investors, who know that a market correction is a predictable event that happens about every 7 – 8 years, stay invested. After all, these investors invest only long term money in the stock market, and they know that long term means 5 – 10 years. They can wait it out.

Buy gold

Gold has always been a “hedge” against economic disaster. That means that when everything else goes down the drain, gold has tended to do well. Even Peter Lynch, in his book “Beating the Street,” recommends holding about 5% of a portfolio in gold “just in case.” When there is NOT an economic disaster, investing in gold is a pitiful investment that has underperformed virtually every other asset class.

The trouble is, when EVERYBODY is buying gold, the price is pushed up to ridiculous levels. The time to buy gold, if you want a hedge for your portfolio, is when nobody else wants it.
Now that you know what everybody says during a market correction that is WRONG, it may be interesting to hear what people say that DO know what they’re talking about. Investment-wise, Warren Buffett comes to mind as a person who’s done well over the years. Let’s see what he has to say.

Cash combined with courage in a crisis is priceless

People with investment portfolios rarely have every cent invested in stocks. Rational people buy with some sort of discipline, be it “value,” “growth,” or modern portfolio theorists, who hold a percentage of their money in different asset classifications. With available cash during a market correction, a disciplined investor will buy opportunistically, in accordance with his or her investment guidelines, taking advantage of “sale” prices.

Don’t invest in things you don’t understand

If Google has a spin-off business that provides advertising business the use of research based target marketing using an algorithm consisting of historic web searches, and you don’t know what the heck that means, but everybody’s buying it and you see it on the cover of Time, Newsweek and the New Yorker, don’t buy it.

Warren Buffett made a fortune buying companies like See’s Candy, Wrigley’s chewing gum and Gillette razor blades. He doesn’t buy high tech companies because he doesn’t understand them. If you do understand the business, by all means invest in it if it falls within your investment parameters. If not, buying something because everyone else is doing it is a very bad investment philosophy. Listen to Warren.

Don’t try to catch a falling knife until you have a handle on the risk

It’s all fine and good to take advantage of low prices. But as we’ve said (twice now), market corrections are marked by wildly volatile price swings. Note that the word “swings” is plural. You’re likely to have more than one chance to buy at bargain prices, and the likelihood also exists that prices will go even lower as panic selling occurs. Don’t be tempted to jump in too soon. Easy does it.