As an investor, you may be gaining familiarity with the term “market correction.” But what does it mean? And, more importantly, what does it mean to you?
A correction occurs when a key index, such as the S&P 500, declines at least 10 percent from its previous high. A correction, by definition, is short-term in nature and has historically happened fairly regularly — about once a year. However, over the past several years we’ve experienced fewer corrections so when we have one now it seems particularly jarring to investors.
How should you respond to a market correction? The answer may depend, to some extent, on your stage of life.
Also, you may want to use the opportunity of a correction to become aware of the need to periodically review and rebalance your portfolio. Stocks, and investments containing stocks, often perform well before a correction. If their price has risen greatly, they may account for a greater percentage of the total value of your portfolio — so much so, in fact, that you might become “overweighted” in stocks, relative to your goals, risk tolerance and time horizon. That’s why it’s important for you to proactively rebalance your portfolio — or, during a correction, the market may do it for you. To cite one aspect of rebalancing, if your portfolio ever does become too “stock-heavy” you may need to add some bonds or other fixed-rate vehicles. Not only can these investments help keep your portfolio in balance but they also may hold up better during a correction.
To avoid being forced into selling you need to be prepared. During your retirement years, try to keep at least a year’s worth of cash instruments on hand as well as short-term fixed income investments. By having this money to draw on you may be able to leave your stocks alone and give them a chance to recover, post-correction. And it’s important to maintain a reasonable percentage of stocks and stock-based vehicles in your portfolio, even during retirement because these investments may provide the growth necessary to help keep you ahead of inflation. Consequently, as a retiree, you should have a balance of stocks and stock-based vehicles, along with fixed-income vehicles, such as bonds, certificates of deposit, government securities and so on.
Being prepared can help you get through a correction — no matter where you are on life’s journey.
This article was provided by Edward Jones Financial Advisor Iain Marshall. For more information call Iain at (530) 676-5402.