How to prepare for market corrections?
Stocks
April 5, 2022
After its sharp March recovery, the S&P 500 is now only down 4.5% in 2022. Those that sold during the March lows would have missed out on a massive rally.
Analysts are now divided over the direction of the market. Morgan Stanley’s Chief US Equity Strategist believes the rally is over — and expects the economy to slow down — while other banks are more optimistic.
Bear or bull, here are some good tips on navigating market corrections from Charlie Bilello.
- First, do no harm.
Bilello highlights a quote by John Bogle, “don’t do something, just stand there!”. Investors often do more harm to their portfolio by trying to time the markets.
- Find your true risk tolerance.
Many assume their risk tolerances to be higher than it actually is — and it’s only until a major drawdown do they realize their true risk tolerance.Since 2000, the US markets have fallen over 50% twice and if this scares you, might want to rethink your risk tolerance.
- Make sure you’re really diversified.
It’s nearly impossible to predict which sectors will perform better and how returns will look like.
If you’re diversified enough, there’s no need to predict which asset class performs better.
- Rebalance to manage risk — buy low/sell high.
If someone had invested 50% of their portfolio into the Nasdaq 100 and 50% into a US bonds ($AGG) portfolio, the split would become 86% Nasdaq 100 and 14% bonds today.
Selling a portion of those stocks so that portfolio balances back at 50/50 would reduce portfolio risk.
