Crash Course: How To Survive A Correction

Chances you live through a severe stock market correction is 100%. It’s the way you handle your equity portfolio that determines whether you will be a good investor or a lousy investor. So better be prepared.

Paul Tudor Jones ones said: that “once in a hundred years events” have started to occur every five years. This is more a statistical fact then the truth, but the point is clear: obvious things won’t happen as much as you think and the unexpected constantly occurs.

The stock market is not a place where somebody wins when another person loses. The stock market is cyclical, so everybody wins at the same time and everybody loses at the same time. The difference in you equity portfolio will be whether you win more or lose more.

Everybody can earn money in a bull market but not everybody keeps that money in a bear market. When you truly understand this concept, you can make a difference.

Patterns repeat all the time because human mindset hasn’t changed for thousands of years. Since 1980, the S&P 500 has had an average intra-year decline of 14.2% but 27 of last 35 years, stocks still finished positive for the year.

Corrections come a lot slower than anyone expects, but once they happen they escalate faster than most could imagine.

Stocks tend to peak individually but bottom as a group. At the deepest bottom, the fear of losing money is higher than the fear to missing out the next bull market.

So what can you do?

# 1. Don’t take too much or too little risk

Too much risk and you’re prone to panic and to having a lower-than-expected balance at that moment when you want to make a withdrawal. Too little risk and you’re not going to get as much investment growth as you should.

# 2. Don’t listen to mainstream media

The media always loves to hype things. The media also loves to hit that panic button hard. The media simply knows that hype and fear are the things that attract viewers and readers. Be calm and measured – don’t fall for the media hype cycle, especially when it comes to your investments.

# 3. Don’t try to time the market

Time in the market is more important than timing the market. It is impossible to guess when the market is at a peak or when it is at the bottom of a decline. There is so much day-to-day variability in the stock market that guessing such things is essentially impossible. Chasing that kind of market timing is going to trigger a bunch of transaction fees and absorb a bunch of your time.

# 4. Don’t let emotions take over the control panel

The worst investment decision is one based on emotions. Those emotions can come from a lot of places. They can come from fear about the future. They can come from anger or sadness in your personal or professional relationships.

The best investment plan is one that’s considered with minimal emotion and one that you stick to throughout those emotional highs and lows.