Stay the Course Through Market Corrections
The stock market is similar to the weather in that both are increasingly prone to widening extremes. Investors should be reminded that stock market corrections are a fact of investment life. Historically, it is not uncommon to experience the stock markets pulling back 10 to 15 percent from previous highs.
What causes corrections
Warren Buffet contends that successful investing doesn’t require extraordinary intelligence, but rather an extraordinary discipline. It helps to understand that stock market corrections are part of a never-ending adjustment between a number of variables. These variables include interest rates and earnings, GDP growth, underlying economic patterns, currency shifts, world trade agreements and political relationships between world powers. Investors who switch their holdings into GIC’s when markets are down are locking in their investment and will be unable to respond to an upward shift.
What to do
Buying high and selling low is one of the most common mistakes investors make. Markets can and will over-react at times. Investors need to diversify to better protect their portfolios against market fluctuations. A balanced portfolio with a combination of asset classes- GIC’S, fixed income, real estate funds, Canadian equity and foreign equity provides a cushion to market volatility. Invest in evenly balanced packages in the equity of great ranking Canadian and foreign corporations. Stick to a personalized and well-structured investment strategy that matches your financial needs, goals, cash flow and long term objectives.
Investing without emotion is easier said than done. There are some important considerations that can keep an individual investor from overselling in a panic. Understand your own risk tolerance and understand the element of risk in the investments. Data shows that an investing strategy and staying the course often results in the best performance returns. Do not get caught up in media hype or fear and buy or sell investments at the peaks and valleys of the cycle. Stay the course and seek advice from a financial advisor before making any decisions regarding your investments.