Wall Street Would Be Boring Without Corrections

Every now and then the stock market retrenches for a while as the experts in the Media and on Wall Street try to sort out events political, economic, social, atmospheric, etc. Hey, it’s their job to (make you think that they can) predict the financial future and that takes time. Monthly portfolio Market Values begin to erode, as does consumer confidence, and the familiar “fear” products become popular because of the “uncertainty” of the Shock Market. When will they (you?) learn? Corrections are quite simply the “flip sides” of Rallies…every bit as necessary and even more attractive than their more popular ”alter egos”. Try to take comfort in the fact that there has never been a correction that has not succumbed to another rally (however short in amplitude or duration), and in these truths of the properly designed portfolio:

• The "Quality" of the securities you own has not and should not change just because the price of the shares has declined. Similarly, falling fixed income security prices have no qualitative significance.
• All things being equal, the "Income" you have been receiving will either remain the same or increase.
• Your “Working Capital Value” is growing every day, regardless of what your portfolio Market Value is doing. (http://www.sancoservices.com/workingcapitalmodel.htm)

Corrections provide investors with the opportunity to add Equity inventory (a chance to buy stocks cheaper than last month) and to increase their overall yield from fixed income securities by purchasing additional shares at lower prices.

As you move further and further from the ancient “buy and hold” or the modern and more ridiculous “core portfolio” concepts; and as you appreciate the fact that open ended Mutual Funds and Index Funds are not “professionally managed” entities; you will begin to realize that both corrections and rallies are beautiful things. Both are too short lived (in investment time), but each requires your close attention, and appropriate action. Embrace each of them with enthusiasm and you will succeed. If you feel that you have sold (taken profits) too soon during a rally, or that you have gotten yourself totally reinvested while the markets are still falling...you are doing it properly! Why? Because market turning points are only visible in rear view mirrors. Sprinkle on a little patience, and everything will turn out just fine.

You must learn to buy (profitable, dividend-paying companies) when prices move down from their highs (20% or more for equities, and especially if it happens in big chunks), and even to add to your existing holdings to produce a lower cost per share.  You must learn to establish reasonable selling targets for profit taking without worrying about stuff like commissions or taxes. (How many times have your unrealized gains become realized losses?). You need to be willing to take even smaller profits when the buying opportunities are abundant as they are today.

You cannot do anything about changes in Market Value in either direction, and selling high quality securities at a loss is almost never either an acceptable or a necessary option. The market is just too big and the hysteria generated by slight changes in expectations is just too pervasive, and this produces changes that are more emotional than they are economic. This is the "known world" of investing and it can be dealt with sanely by purchasing only "investment grade", income-producing securities. Never let "FEAR" cloud your thinking and always jump on the opportunities created by those who do. Sure it’s easier to imagine that your market value will rise every month and, frankly, it’s a lot more fun to take profits. But if you don’t buy during the corrections, the thrill of victory won't be yours too often. So relax and enjoy the opportunity to buy less expensively just as enthusiastically as you will enjoy new profit taking opportunities when it is their turn to regain the Media limelight.