We would all just love to miss out on market correction. Nobody likes to lose money whether booked or just assumed. Paper wealth feels so much better than paper poor, right? Of course it does. But there is no bell rung to say 'get out here' or 'take some profits there'. It always seems like one step forward, two steps back - and we can never make any progress.
Markets DO correct because at some point investors take profits. This is just a natural progression as stocks move from one set of hands to another. There are a million reasons to sell but only one reason to buy. To that end, stocks can become cheap in one's eyes as they might be extremely expensive to another.
Again, nobody likes to lose money even if it's on paper. How can we learn to accept corrections as an eventuality that we will often not expect to happen? We can be prepared, and that means having two things: higher levels of cash and protection. We talked in last week's blog about the importance of having protection, and suggested using index put options when market volatility is low to serve this purpose.
Having cash ready is sometimes difficult for some, but when those stock prices start falling there is a sense of relief when ready to put it to work. The challenge of course is to time it right, and that is where we need to come up with a plan. Corrections happen but are not all that common especially in a bull market run. Yet, they have become quite the opportunity to get on board.
I would advocate taking advantage of a 3%-5% market pullback to start adding to or establishing new positions in stocks. Further, I would consider pruning or weeding out older names that may have already started correcting or are not producing for a portfolio. Take General Electric (GE) , a perennial loser for years. This stock should have been taken off the board and exchanged for a better performer in the group (like a Honeywell (HON) or Boeing (BA) ) some years ago when these stocks pulled back.
The constant watching of portfolios, pruning, exchanging with non-performers and having strong levels of cash will allow us to take advantage of corrections when stocks are suddenly on sale. If the trend is higher then these opportunities will be looked at in the future as great buying chances. These are the moments when large wealth shifts are made.