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How Should You Respond to Market “ Correction ”?
As an investor , you may be gaining familiarity with the term “ market correction .” But what does it mean ? And , more importantly , what does it mean to you ?
A correction occurs when a key index , such as the S & P 500 , declines at least 10 % from its previous high . A correction , by definition , is short-term in nature and has historically happened fairly regularly – about once a year . However , over the past several years , we ’ ve experienced fewer corrections , so when we have one now , it seems particularly jarring to investors .
How should you respond to a market correction ? The answer may depend , to some extent , on your stage of life .
• If you ’ re still working … If you are in the early or middle parts of your working life , you might not have to concern yourself much about a market correction because you have decades to overcome a short-term downturn . Instead of selling stocks , and stock-based investments , to supposedly “ cut your losses ,” you may find that now is a good time to buy more shares of quality companies , when their price is down .
Also , you may want to use the opportunity of a correction to become aware of the need to periodically review and rebalance your portfolio . Stocks , and investments containing stocks , often perform well before a correction . If their price has risen greatly , they may account for a greater percentage of the total value of your portfolio – so much so , in fact , that you might become “ overweighted ” in stocks , relative to your goals , risk tolerance and time horizon . That ’ s why it ’ s important for you to proactively rebalance your portfolio – or , during a correction , the market may do it for you . To cite one aspect of rebalancing , if your portfolio ever does become too “ stock-heavy ,” you may need to add some bonds or other fixed-rate vehicles . Not only can these investments help keep your portfolio in balance , but they also may hold up better during a correction .
• If you ’ re retired … After you retire , you may need to take money from your investment accounts – that is , sell some investments – to help pay for your cost of living . Ideally , however , you don ’ t want to sell stocks , or stock-based vehicles , during a correction – because when you do , you may be “ selling low .” ( Remember the most common rule of investing : Buy low and sell high . It ’ s not always easy to follow , but it ’ s still pretty good advice .)
So , to avoid being forced into selling , you need to be prepared . During your retirement years , try to keep at least a year ’ s worth of cash instruments on hand as well as short-term fixed income investments . By having this money to draw on , you may be able to leave your stocks alone and give them a chance to recover , post-correction .
And it ’ s important to maintain a reasonable percentage of stocks , and stock-based vehicles , in your portfolio , even during retirement – because these investments may provide the growth necessary to help keep you ahead of inflation . Consequently , as a retiree , you should have a balance of stocks and stock-based vehicles , along with fixed-income vehicles , such as bonds , certificates of deposit , government securities and so on .
Being prepared can help you get through a correction – no matter where you are on life ’ s journey .
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor .
Matt Dudkowski , AAMS ® | Financial Advisor | 1007 Mt Royal Blvd . Pittsburgh , PA 15223 | 412.487.3300 matt . dudkowski @ edwardjones . com | www . edwardjones . com
Matt Dudkowski has been a financial advisor with Edward Jones since 2002 , serving individual investors in the Pittsburgh area from his Shaler Township office . In January of 2015 , Dudkowski accepted an invitation to become a limited partner with the firm .
Since joining Edward Jones , Dudkowski has obtained the professional designation of AAMS ®. Prior to Edward Jones , Dudkowski , as a CPA , worked at the H . J . Heinz Company , and at Ernst & Young LLP . He currently serves on the board of directors for Keystone Wellness Programs , a local nonprofit organization .
A native of Butler County and a graduate of the University of Notre Dame , Dudkowski resides in Gibsonia with his wife , two sons and daughter .
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