In our recent piece “Assessing the Probability of a Stock Market Correction,” we explained the nature of corrections and examined the probability of a stock market correction occurring this year. We concluded we would not be surprised if a stock market correction occurred sometime in the future. Is there something that investors could or should do to prepare for the possibility of a stock market correction?
Is There a Way to Avoid the Downside of a Market Correction?
Given that stock market corrections are normal in a healthy market but unpredictable and short in nature, it’s nearly impossible to time it correctly. However, one strategy to avoid locking-in the downside of a market correction would be to remain invested throughout the correction.
Below is a chart of the S&P 500 similar to the one we used in our “Assessing the Probability of a Stock Market Correction” piece, which illustrates the performance of the S&P 5001 from December 31, 2010 – August 14, 2013 (Click on the chart for a larger version):
As an example, consider an investor with a long-term goal of growth and a diversified all-equity portfolio allocation. Looking at the chart above, a good strategy for this investor starting in 2011 through today would have been to maintain his or her allocation to equities the entire time, even though there were four larger market pullbacks along the way.
Why? Because in the end, although this hypothetical portfolio likely experienced declines by staying invested throughout the corrections, it did not lock-in those losses. By remaining invested, the portfolio crucially captured the upside when the market recovered, which is important over time for an investor with a long-term goal of growth. It can also be a challenge to determine whether a correction could turn into a more prolonged market downturn.
Consider Strategies that Attempt to Avoid Bear Markets
Instead of trying to time stock market corrections, you may want to consider investing a portion of your portfolio in a strategy whose objective is to try and help limit losses in portfolios during prolonged downturns in the market, such as bear markets.
Two strategies you may want to consider are F-Squared Investments’ AlphaSector Premium and Good Harbor Financial’s US Tactical Core. Click on their names to request more information about each strategy. As it’s important to diversify across asset classes and money manager strategies, using these types of strategies could help to diversify your portfolio.
Do You Have a Bear Market Strategy?
Our Wealth Managers can help evaluate your financial situation, your goals, and help you determine if your current portfolio allocation is designed for various market conditions. Call one of our Wealth Managers at 1-800-541-7774 to evaluate your portfolio at no charge, or get started here by answering a few questions.
Sources:
1 Yahoo! Finance
