Different market commentators put different spins on things but the simple reality is that we are in the middle of a market correction. A market correction is just what the name implies - a correction to a market that has risen too high. At first, the drop in values may seem frightening. With 2008 still fresh in investors’ minds even after 10 years of fantastic returns, it’s understandable that most of us would feel a tinge of apprehension. But don’t panic.
A correction is a natural part of investing. It doesn’t necessarily indicate that the market will nosedive into global financial crisis territory. The markets’ cyclical nature is a fundamental truth that investors need to keep in mind.
A market correction can be damaging for those who fail to follow the three tips. These investors often panic as the markets fall and cash up – losing investment value. They then sit too long in cash and miss the inevitable market rebound. We recommend clients follow our three tips to ensure there is potentially a silver lining with market corrections.
- Develop and stick to a sensible plan: Timing the market is not advisable. Investors should focus on time in the market allowing investment returns to compound year after year. Selling off stocks after they dip may leave you worse off than you would be if you remained invested. Don’t sell just because others are selling. Quarterly returns may make the markets appear volatile, but the market appears comparatively tranquil over a longer period - an insight that may be forgotten amid short-term market swings. Long-term buy and hold investing may not be exciting, but it has historically been an effective strategy.
- Be greedy when others are fearful: “The more the market goes down, the more I like to buy”, investor Warren Buffet said as he bought more shares during a sell off a few years ago. Use the dip in market value during a correction as an opportunity to buy investments at a discount - knowing that if they are quality investments, then they will inevitably rise again in value.
- Have a well-diversified portfolio: We are firm believers in recommending clients have a well-diversified portfolio which also includes cash. Diversification helps minimise any market fall by ensuring all your investments are not in the investment sector or asset class that has been hit hardest by a correction. A well-diversified portfolio also includes enough cash to enable clients to continue to fund their lifestyle and not have to cash up investments that may have fallen in value over the short-term.
Give your Milestone adviser a call if you want to take steps to minimise the impact of any future correction.