A market correction, which takes place when there’s a precipitous drop in the stock market, can seem like an investor’s worst nightmare. And while declines can actually be healthy, allowing markets to rebalance and readjust, that knowledge may be cold comfort to investors when it comes to the thought of losing money on their investments.
Investors can overcome this unease by knowing how to prepare for a downturn in the markets, even when it’s unexpected.
Diversification among various stocks and asset classes can somewhat protect an investment portfolio against a market correction. But in this evolving and volatile market environment, how can investors know which stocks will position their investment portfolios properly?
What about other asset classes such as cryptocurrencies? Here is what you need to know about how to approach investments during a market correction:
— What is a market correction?
— How to treat stocks in a correction.
— Stock technical analysis.
— How to think about cryptocurrencies during a downturn.
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What Is a Market Correction?
A market correction takes place when there is a sharp drop in the stock market. More specifically, a 10% decline in a broad measure of stocks from its highs within a short period. Market corrections are abrupt and can occur without warning.
Corrections are common following a period of positive market performance. Throughout 2021, investor optimism, along with the Federal Reserve’s accommodative monetary policy, has resulted in markets reaching all-time highs. Investors have piled into the markets, making profits during the bull market, and resulting in more money entering the markets, a cycle that could lead to overvaluation.
When investors see a window of opportunity to sell their overvalued shares for a profit, this trend can accelerate throughout the markets and cause a massive sell-off, leading to a correction.
[READ: Are Stocks, Real Estate and Bonds in Asset Bubbles?]
How to Treat Stocks in a Market Correction
If your portfolio is heavily allocated toward stocks, you may be wondering what the best course is if a market correction is looming. Having a portfolio that’s properly balanced among stocks, bonds and any other asset classes according to risk tolerance can be a winning strategy, experts say.
Given that stocks have been performing well for the past decade, investors need to be “dialing back equity exposure and make sure they have a healthier weight to bonds” to guard against a pullback in stocks, says Donald Calcagni, chief investment officer at Mercer Advisors in Denver.
He adds, “Within equities, investors should be rebalancing their portfolio toward value stocks.”
As the economy struggles to emerge from the coronavirus pandemic and interest rates rise, value stocks may outperform growth stocks.
These growth stocks, such as Facebook Inc. (ticker: FB), Amazon.com Inc. ( AMZN) and Alphabet Inc. ( GOOG, GOOGL), have had an amazing run…
Read More: How to Prepare for a Market Correction