3 Strategies to Employ During a Stock Market Correction | Personal Finance


(Maurie Backman)

The stock market has a long history of inducing panic in investors. And in February, it did just that.

Last month, the S&P 500 index officially entered correction territory, which means it dropped at least 10% from its previous high. But some investors may have seen their portfolio values ​​shrink more than 10% last month. And so all told, we’re in a tricky spot as we try to navigate these uncertain times. With that in mind, here are a few strategies you may want to employ in the near term.

Image source: Getty Images.

1. Keep buying stocks

You might assume that when stock values ​​plummet, your best bet is to stay out of the market. But actually, stock market corrections can be buying opportunities.

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Imagine there’s a company you’ve wanted to invest in, only you’ve held off due to an unreasonably high share price. With stocks in correction territory, you may find that stock price more palatable.

Furthermore, it definitely pays to keep putting cash into your IRA or 401(k) plan — and keep investing that money while stocks are down. If you’re not keen on hand-picking individual stocks during turbulent periods, you can always fall back on broad market index funds.

Index funds give you instant diversification and take a lot of guesswork out of investing. And so they’re a good option if you’re worried about making poor choices at a time when your nerves may be frayed.

2.Hoard some cash

Because stock market corrections can open the door to buying opportunities, it’s important to have cash at the ready. But that’s not the only reason to increase your cash reserves.

The danger of having inadequate cash on hand during a market downturn is having to tap your portfolio in a pinch to cover unplanned expenses. But if you set aside some extra cash to cover life’s unknowns, you may not have to resort to liquidating investments when they’re down — and locking in permanent losses you then struggle to recover from.

3. Branch out in your portfolio

Stock values ​​are far from stable these days, and that may be throwing you for a loop. That’s why it’s a good idea to expand your horizons and make sure you’re not solely putting money into stocks.

Of course, bonds are generally a safer fallback option because their values ​​don’t tend to fluctuate as rapidly as stock values ​​do. But bonds also don’t tend to deliver the same long-term returns as stocks.

That’s why REITs, or real estate investment trusts, may be a better bet. REITs commonly trade publicly like stocks and are similar in that you can track their share price. But REIT values ​​don’t always follow the same pattern as stock values ​​during periods of market turbulence, so buying them may give you some added protection.

Furthermore, REITs are known to pay rather generous dividends. And that extra income could help offset other losses in your portfolio during a correction — even if those losses are only on screen.

It’s hard to stay cool and collected during periods of market turbulence. But remember, stock market corrections aren’t anything new. The market has undergone plenty of corrections in its long history and ultimately recovered over time, so do your best to stay level-headed as we ride out this stressful wave.

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