August 6, 2018
How to prepare for a market correction
It’s simple. Don’t.
A common question we receive is “how do I prepare for the inevitable stock correction?” There are two answers to this question: the one you want to hear (which is wrong), and the one you don’t want to hear (which is right).
Mainstream media wants you to believe that you can outsmart the market. Everything you read and hear from news sources and financial “experts” will make you think this (almost) 10 year bull run is coming to an end. “Trump, North Korea, inflated stock prices, interest rates, trade wars, Trump (again), etc.” is blasted through your television sets every day of the week followed by “sell stocks, buy bonds, no don’t buy bonds because of interest rates, buy bitcoin, no sell bitcoin and buy Alibaba.” Here’s the million dollar question: “With all this information and all this uncertainty, what should I do?!”
Nothing. Often times in the face of fear, the best course of action is to stand still. The problem is that this type of “inactivity” is perceived as unintelligent behavior when actually the opposite is true. This is proven by math and science. This is a fact. Mainstream media won’t tell you this for a simple reason; If Jim Cramer got on the air and told his viewers to hold a diversified portfolio and not to worry about the uncertainty in the markets, he wouldn’t have a whole lot of viewers. It’s boring, it’s not entertaining, but it is the best way to build wealth. Ignore these expert opinions. They don’t know any more than you do.
Market returns typically come in short and unpredictable bursts. We don’t know when these bursts will happen, but it’s of crucial importance that you are there for them. You must be there when opportunity knocks, whenever that may be.
I’ll bore you with some facts: If we look at the last 1,100 months (90 years) and removed the best performing 91 months, the average return of the remaining ~1,000 months is practically zero. In other words, 8.50% of the months provided almost 100% of the returns over the last 90 years! We don’t know when these months will come, but we must participate in them!
Legendary investor Peter Lynch said it best – “Far more money has been lost preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves.” Stay invested, construct a plan, and stick to your plan through good and bad times. And most importantly, focus your time and energy on factors you can control; how much risk to take, what mix of investments, and how much the investments cost to name a few.