A correction is a good idea to pull up again & get ready for the rollercoaster. Many people investing in Mutual Funds, Secondary market retaliate to this view. As per them, Correction in the share market leads to lower down their portfolio or drag down their NAV. Theoretically, even technically I’m told, and corrections adjust equity prices to their actual value or support levels. In reality, it’s much simple than that.
Prices go down because of speculator reactions to expectations of news, speculator reactions to actual news, and investor profit taking. The two former “becauses” are more potent than ever before because there is more self-directed money out there than ever before. And therein lays the core of correctional beauty!
Mutual Fund unit holders rarely take profits but often take losses. Investors in Mutual funds do not realize that if their NAV is dragging down, the units they have in their portfolio is having an opposite impact that is the units in their portfolio increases. One can have a positive effect if the following are being considered in Correction phase.
* Resist the urge to decrease your Equity allocation because you expect a further fall in stock prices. That would be an attempt to time the market, which is (rather obviously) impossible. Asset Allocation decisions should have nothing to do with share market expectations.
* Have a look at the past. There has never been a correction that has not proven to be a buying opportunity, so start collecting a diverse group of high quality, dividend paying, low priced companies.
* Don’t hoard that “smart cash” you accumulated during the last rally, and don’t look back and get yourself agitated because you might buy some issues too soon. There are no crystal balls, and no place for hindsight in an investment strategy. Buying too soon, in the right portfolio percentage, is nearly as important to long-term investment success as selling too soon is during rallies.
* Examine your portfolio’s performance.
Corrections (of all types) will vary in depth and duration. They are easy if you are able to cope up with them.
So if you over think the environment or over cook the research, you’ll miss the party. Unlike many things in life, Share Market realities need to be dealt with quickly, decisively, and with zero hindsight. Because amid all of the uncertainty, there is one fact that reads equally well in either market direction: there has never been a correction/rally that has not succumbed to the next rally/correction.