Vail Daily column: How should you respond to market ‘correction’?
February 22, 2016
As an investor, you may be gaining familiarity with the term market correction. But what does it mean to you?
A correction occurs when a key index, such as the Standard & Poor 500, declines at least 10 percent from its previous high. A correction is short-term in nature and has happened fairly regularly — about once a year. For the past several years, we've experienced fewer corrections, so when we have one now, it can be particularly jarring to investors.
How should you respond to a market correction? The answer may depend on your stage of life.
• If you're working: If you are in the early or middle parts of your working life, then 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, you may find that now is a good time to buy more shares of quality companies, as their prices are down.
You may want to use the opportunity to become aware of the need to periodically review and balance your portfolio. Stocks and investments containing stocks often perform well before a correction. If their prices have risen greatly, then they may account for a greater percentage of the total value of your portfolio. In fact, you might become over-weighted in stocks, relative to your goals, risk tolerance and time horizon. That's why it's important for you to proactively balance your portfolio — or, during a correction, the market may do it for you. To cite one aspect of balancing your portfolio, you may need to add some bonds or other fixed-rate vehicles. These investments may help keep your portfolio in check and 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. 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 from, you may be able to leave your stocks alone and give them a chance to recover, post-correction.
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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 and government securities.
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 adviser. Edward Jones and its associates and financial advisers do not provide tax or legal advice. Tina DeWitt, Bret Hooper, Charlie Wick, Kevin Brubeck, Dolly Schaub and Chris Murray are financial advisers with Edward Jones Investments. They can be reached in Edwards at 970-926-1728 and in Eagle at 970-328-4959 and 970-328-0361.
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