3 Steps to Take During a Stock Market Correction

For all the talk there’s been over the last two-plus years of a looming stock market correction, one has yet to take hold. The S&P 500 had a banner year in 2013, is up this year +4.15% through August 1,¹ and has been in a fairly steady climb since 2012. For two years, the market has resisted a correction in the 10% - 20% range.²

In July, however, the S&P 500 posted its first monthly loss since January, and on July 31 saw its biggest point drop since April.³ It’s possible this weakness marks the beginning of a stock market correction, though no expert can know with certainty. What we do know, however, is that corrections are a normal part of bull markets, and there are steps you can take when one occurs.

What to Do During a Stock Market Correction

Corrections are generally defined as relatively short-lived pullbacks in the market in the 10% - 20% range, something we haven’t seen since the summer of 2012. As you can see below, over the last 34 years the market experiences average intra-year declines of -14.4%.

Past Stock Market Corrections and Declines

(Click chart for larger version)

Source: Standard & Poor’s, FactSet, J.P. Morgan Asset Management. Returns are based on price index only and do not include dividends. Intra-year drops refers to the largest market drops from a peak to a trough during the year. For illustrative purposes only. *Returns shown are calendar year returns from 1980 to 2013 excluding 2014 which is year-to-date. Guide to the Markets – U.S. Data are as of 6/30/14.

If a market correction does take hold, here are three things you should do:

1. Review Your Portfolio Strategy with Your Financial Advisor

Ask your financial advisor how your investment plan is positioned to handle a stock market correction. In many cases, having a properly diversified portfolio is the most useful tool to reduce volatility when it sets in. For example, your portfolio could feel some cushion if your fixed income and dividend-paying stock allocations don’t feel the sting of a correction as much as the broader markets and your other investments.

2. Turn Off CNBC!

Financial news outlets are a great source of daily information for the markets, but it’s also fair to say that the media thrives on volatility. It’s possible that these types of outlets’ viewership increases when the markets show signs of correcting as people look for information, so there’s incentive to sensationalize news stories. This can make investors emotional about the direction of the market and how it could affect their investment portfolios, and increases the likelihood that an investor will make a knee-jerk decision – one that could hurt them.

The founder of Vanguard Funds, John Bogle, was trying to help investors avoid these types of emotional decisions when he said, “Don’t be captivated by the siren song of the market,” adding that “impulse is your enemy.”⁴ We couldn’t agree more.

3. Consider Tactical Money Managers for Your Portfolio

These types of money manager strategies take a risk-managed approach to investing – seeking to capture upside in the market during good times while also maintaining the ability to move to cash should the market experience a prolonged decline. In other words, they aim to give investors a better risk/reward relationship with a focus on downside protection.

One such tactical money manager, Newfound Research, approaches investing through a risk-managed framework and seeks to limit significant capital loss for their investors.⁵ Newfound applies their strategy across multiple investment styles such as small cap, global, and risk-managed income.

If you would like to learn more about them and how they might fit into your overall portfolio, click here to request more information. One of our Wealth Managers can help you.

Is Your Portfolio Positioned for Whatever Market Conditions Are Ahead?

Now is a great time to review your portfolio strategy to see if it could weather the potential effects of a market correction, and to make any needed adjustments. One of our Wealth Managers can run a detailed analysis of your portfolio for you, and can make suggestions for how you can improve your investment plan. For starters, if you do not yet have a tactical money manager in your plan, we can also give you more information on how they work and which money managers we are currently recommending.

Give us a call today at 1-800-541-7774 to get started, or if you prefer to start a conversation with us over email, send a note to Wealth@wrapmanager.com.