What to do during a stock-market correction

Investors aren’t lacking for things to worry about at the moment, including Russia, inflation, the rate hike, the market downturn, the real estate market, the labour market, the pandemic, and supply chains, to name but a few. I can, of course, assess each of these issues and share my opinion with you, but it wouldn’t be of much help since the only crucial factor to keep in mind is that no one can predict the future!

No one could have predicted the dramatic market upswings of 2020 and 2021 despite the worst pandemic outbreak in a hundred years.

When the stock market is dropping, investors have three options:

-        Do more

-        Do less

-        Do nothing

Typically, in many areas of our lives, doing more leads to better results. This is true for sport, where more training is rewarded with performance improvements. Similarly, more studies yield better results, and so on and so forth.

It doesn’t necessarily work that way for investments. There appears to be an inverse relationship between effort and outcome. Often, the more investors try to do, the worse the results. This may seem counter-intuitive, but, sadly, it’s true. Combine this with poor timing, and bad results get even worse.

With the benefit of hindsight, predicting dips in correction periods seems so easy, but it remains impossible in real time. People’s innate reflex is to assert control in times of crisis, and it’s easier to make costly mistakes that way. The way to come out on top in a stock-market correction is to limit mistakes, just like a game of tennis or NHL hockey.

That’s why it’s important to make sure that your portfolio is in line with your investor profile and well-diversified prior to corrections, because once the stock market starts to drop, it’s too late to reduce your risk exposure. Stock-market corrections have various causes, and you should know that there is no perfect instrument that can protect you equally well in times of inflation, deflation, bull markets, bear markets, rising interest rates, falling interest rates, peacetime, wartime, recession, growth or any other situation… which is why it’s important to be well-diversified!

Stock-market risk is not new; corrections are perfectly normal and part of the stock-market cycle. Unfortunately, this is the price we have to pay to achieve a decent return for a comfortable retirement. Investors need to stay rational. This requires patience, discipline, and the ability to ignore short-term fluctuations.