If you’re new to financial planning, you may be wondering; what is a market correction? In the simplest of terms, a ‘correction’ occurs when there is a ten percent or greater decline in the price of a security from its most recent peak. These corrections can happen to any asset that is traded on an exchange, especially, equity investments.
Many consider market corrections to be an investor’s biggest adversary. However, what most people fail to realize is that if you plan well and stay prepared, a market correction is nothing more than a speed bump on your road to financial independence. Here are a few tips that help you prepare for a market correction and deal with the aftermath.
- Understand the Risks: The first thing you need to do to ensure you’re prepared to handle a market correction is to understand the amount of risk you’re holding. Here’s how it’s done. Categorize your investments on the basis of how likely you are to lose your entire investment if something goes wrong. When you do this, you’ll have a much better idea of what kind of losses you might incur in the event that a market correction takes place. At the end of this exercise, you’ll be able to alter your portfolio (if required) with ease and minimize your risk without compromising on your financial goals.
- Supplement Your Income: Look for avenues to offset any losses you may incur as a result of the market correction. Alternate sources of income are a great way to make sure you still have money to invest even if the market doesn’t give you the returns you weren’t expecting. And since there’s no telling when the market stabilizes, it’s better to have a safety net, especially if you’re in the middle of clearing out your debts or have other such planned expenditure.
- Sit Tight: Contrary to popular belief, market corrections aren’t necessarily a big event. It is a routine fluctuation. The important thing to remember is to not get alarmed by it. If you’re already invested fully, just ride out the correction and let the market stabilize. Ups-and-downs are a standard feature of any market. As long as you have your long-term goals in sight, a market correction can’t do much to damage your portfolio or alter your financial planning route map.
- Don’t Waver from Your Retirement Plan: If you have a retirement plan in place, don’t let a market correction unsettle that in any way. If you’re investing specifically for your retirement, the chances are that you’ve invested for the long terms and your investments will yield its true returns over a long period. So, stay put, and stick to your guns. Remember the old adage – this too shall pass.
- Stay Clear of Doubt: Whenever there’s a market correction, you’ll have loads of self-proclaimed experts telling you what to do. Your job is to take that advice, put it in a box, and throw it out of the window. If you have done your homework right, your financial plan is fine as it is, and no one knows what to do with your portfolio better than you and your personal financial advisor.
In case you feel that dealing with fluctuating markets isn’t really your cup of tea, you can choose to invest only into channels that are not associated with the ups and downs in the market. Such investments have long tenures, low-risk, and a guaranteed ROI liked fixed income investments. However, they come with a huge opportunity cost (the cost of missing out an opportunity), as the same amount of money invested into the equity market, for the same amount of time, will most probably yield significantly better results over a long period.