What Is A Stock Market Correction?
A stock market correction is when the stock market main index (in this case the KLCI Index) drops by 10 to 20%. Throughout our short market history, stock market corrections happen fairly often. It is something to expect which relate to the stock market investing cycle.
What usually happen is some influential people or funds decided that the profits were too good to refuse and took money off the table. Some research reports that stock market corrections are to be expected every 2-3 years on average.
The most recent stock market correction was back in 2013, during the few months leading to GE13. If you remember that occasion, the stock market was very volatile. One day it was up a couple of points, then it was down 30+ points the next day. It was a crazy time.
How To Survive A Stock Market Correction
If you agree with me that corrections are part and parcel of the stock market investing cycle and happen fairly often, the next step is to be prepared for it when it does come around. Here are a handful of tips to survive a correction and come out from it with most of the eggs intact.
Always Take Profits From The Stock Market
This is the most sensible thing to do in the stock market, period. When the price of your shares hit the profit target, sell and get out from the stock.
Buy and hold is good if the stock have not move. But if the stock move a lot in a short period of time, it is probably time to take some profits as it could be priced way above the intrinsic value.
Cash Is Always King
As the stock market goes higher and higher, it is probably a good time to take profits on your stocks and go into more cash. Be smart and keep the cash intact. Don’t go chase after another stock using the available cash you have in hand.
Sometimes it is better to sit tight and do nothing. Wait until you see a real stock market correction before using the cash you stashed away for a rainy day.
Keep An “Opportunity Fund”
If you like to explore this “cash is always king” idea further, why don’t you keep some money in an “Opportunity Fund” – this is a cash account that you funnel money into over time, allowing you to take advantage of opportunities when they present themselves to you.
If the market drops by 10%, you could take some of this money and put it in the market. There are many uses for an opportunity fund, so having one for a rainy day such as this is a good idea.
Don’t Put Everything In The Market
People tend to put more money into investments that they are getting good returns over time. This happens fairly often in the stock market, especially during an extended bull run such as what we are experiencing today. In the end, they have everything they own in the stock market. And, this could be a fatal mistake.
In fact, as the stock market goes higher, it is a wise move to slowly reduce your expose to the market until things look cheaper. To survive a stock market correction, you need to keep a good balance between what you have in the stock market with your other investments so that you can come out from it with most of your eggs intact.
Drawing Up A Survival Plan
Everything starts with a plan. If you do not have a plan to prepare for a stock market correction, how are you going to be ready when it comes. But, with a plan in your hands, you will know why you are doing what you are doing and will be able to better survive a stock market correction.
Conclusion
Are we due for a stock market correction? Maybe but the fact is the stock market bull is ageing. Will one happen, for sure, but when no one knows. As a result, your best option is to get ready and be prepared when it comes. This is how you be a successful investor in the stock market. Period.
How do you think the stock market of Malaysia ? Do this time correction is over or just starting ?
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