About 2 week ago I was writing an article which I called “Market Direction – Should We Be Getting Worried”, which looked at a longer range view of the stock market direction heading into the fall and the Christmas Period. I had wondered what would happen if earnings on big caps stocks started coming in short of expectations. But shortly after starting into the article the market seems to find its footing and head higher, so I put my article on hold thinking that perhaps I was premature.
Just to be clear that at the time of writing this new article (Oct 21 2012) I still think that if we see a correction it will not be a severe bear market as the Fed continues to provide liquidity as is the ECB to Europe. No one will want to see a major sell-off in the markets as the recovery remains fragile, unemployment is still high, housing is only starting to bottom and there is a Presidential Election under way.
But as in everything there is never a solid guarantee. So it never hurts to be prepared. In this article I discuss in simple terms the steps I take when the stock market begins to correct. At the outset the steps are small and non intrusive to the overall portfolio but as the correction strengthens I take bigger steps to protect my existing portfolio and seek larger profits from the correction.
Part of the problem a lot of investors face is indecision when the market corrects. Many investors hope that it will not be “too bad” and worry more with each passing day. Failure to take any steps during a market correction is a mistake that can inflict severe damage to an investors portfolio. If a full-blown panic erupts many investors cannot handle the barrage of bad news and high volatility and sell out taking enormous losses.
This is why I developed my simple strategy which takes away a lot of the indecision process which allows me to focus on the steps rather than the market direction itself. This takes away a lot of the stress of a market correction and a lot of the worry.