Lessons Learned from the Recent Market Correction

If there’s one goal I’ve had for this blog all along, it’s to be transparent and honest.  That’s quite easy for someone like me, middle class and not a household name.  I don’t have to uphold a façade, to pretend as though I have it all together, unlike famous people who are very good at pretending.

And honestly speaking, right now it’s tough for “regular” people like me in various parts of North America.  In my part of the continent, jobs are drying up in large numbers due to the various factors we’ve all been hearing about over the past year.  Compounding this is living in a region that’s overly oil-and-gas dependent.

On a more personal note, I’m also having to deal with my dad, terminally ill with cancer in hospice care.  Being two hours away doesn’t make me too helpful in this situation, so I head up every weekend to spend at least some time with my folks.  That leaves little time to keep up with regular blog entries.  The reality of my humanity means that I don’t intend or even care about robotically posting every two or three days, like most others seem to do in blogdom.

So for those of you expecting me to churn out posts on a regular basis, even when my life is not turbulent – sorry, it ain’t gonna happen.  I post when I feel it’s most important – quality over quantity – and now is one such time.

Adding to the potential for turmoil in my life, and the lives of you who share my love of investing, is the recent market correction.  Actually, I started writing this post after the first big plunge in late August.  But as I’ve since learned, most corrections take several weeks, sometimes a few months, to play out.

Here’s another honest confession:  this correction is the first major test I’ve experienced since my investing turn-around in mid-2013.  There have been a few dips since that time, but this has been the first real plunge, and the daily convulsions have sent all but the most resolute investors running for the exits.

I read that the start of this correction was the Dow’s worst 3-day point decline in history and that the S&P lost $900 billion in the two worst sessions (Monday and Tuesday, August 24th and 25th).  For some reason, I remember a much larger and faster plunge in 2008, but I guess that statistically the start of this correction was historical perhaps due to dollar amount rather than percentage amount.

So how have you reacted?  What would you do differently the next time, if anything?  As you ponder these questions, allow me to share what I have realized thus far during this correction.

I haven’t actually lost any money

I’m going to state the absolute most important realization first.  Too many people think that a market dip, correction, or crash means that they’ve lost their money.  However, this is only true for those who choose to sell.  In 2008, a number of people pulled out because they had to.  They had gambled, they had dabbled in options or borrowed to invest.  Then when their options and loans were called, they had no choice but to sell at a massive loss.

You and I don’t have to be like them.  If the money you have invested is not needed for another few years, then there is absolutely no point in panicking.  You’ll only lose if you sell out.

Do a search for statistics about the period following the most infamous market dips, corrections, and crashes and you will notice that the people who rode out the storm – who didn’t sell – had more money than they had before the storm sometimes within a matter of only months.  Which leads me to my next realization …

It’s better just to do nothing

When the first tremors occurred in late August, I’ll admit that for part of a morning I toyed with the idea of getting out of everything and then buying back in at lower prices.  But it was an idea that flashed in and out of my mind, because I quickly realized – due to a large amount of brainwashing on the subject – that I could not be sure that I would be correct in my timing.

Nobody ever can predict the highest highs or the lowest lows.  Nobody.  Did I mention – NOBODY??  Not even Warren Buffett, who even admits that he doesn’t even try to time the market.  He’s only interested in solid businesses regardless of stock price.

A few of my stock holdings, my best performers, that have been surprisingly resilient, and I would have regretted selling them.  Even though they also took a brief dip in late August, they are still at or close to their all-time highs.  How could I have been certain that I would have bought at their lowest lows?  How could I have been certain that their prices would not have dropped even more?

So I adhere to the philosophy of The Motley Fools in this instance.  I hold on no matter what, unless the thesis of a company has radically changed for the worse, and I don’t’ sell but rather buy more on the dips, which leads me to my last realization …

I should have had some cash set aside

This is one tactic I’ve known about for several market dips, corrections, and crashes but which I find the hardest to put into practice.  When I see prices going up, I want to jump on board lest they go ever higher and I miss out.  In most cases, I’ve been well rewarded.  I some cases, I should have been more patient, but then again I am not omniscient – and nobody else is (as I just discussed).  Thus, I find it incredibly difficult to wait for that stock to reach a new 52-week low, for example, before starting or adding to a position.

However, this isn’t always the best philosophy.  If you wait for the likes of Starbucks, Under Armour, or the Canadian-based convenience-store behemoth Alimentation Couche-Tard to reach a new 52-week low before jumping on, then you may never get the chance to in the first place, at least not for a few years.

The better philosophy is to wait for dips and then jump on.  Even if great performers do eventually have a crash, it might be so far in the future that you’ll still have a decent return.

For those of you who, like me, struggle with creating a stash of cash, who always seem to want every last dime invested, I’m afraid that I’m no guru on the subject.  But I can pass along some wisdom that I’ve read about.

One investing service will sell a holding when its price dips 20 percent below what they bought it at.  They will also increase their percentage of cash holdings in times of market uncertainty by selling winners who seem on the verge of correcting or who are no longer true growth candidates.

As for their winners with no signs of weakness, they will let those run.  After all, if you have a holding that’s already up a lot and market turmoil has minimal effect and the company’s thesis hasn’t changed and you don’t need the money for several years, then why sell it?  The bottom line is, these folks always have some cash set aside, even when the market is hot, because then they can buy on the dips and especially when the market corrects or crashes.

If you’re a brand-new stock investor – or still thinking about it – then I highly recommend the free e-book, Should You Consider Stock Investing?  It could become one of the most beneficial 30-minute reads of your life.

One last thing:  be sure to click the Follow button near the top of this page on desktop or after this post on mobile.  (I don’t post regularly because I believe in quality over quantity, so keep an eye on your Inbox.)

To new beginnings!

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