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5 Essential Rules for Market Corrections Marcus Today February 2025 |
Sharp Corrections and Market RecoveriesSome of the best moments in the market are the runaway rallies before a correction. If you don't participate in those exuberant periods, you'll never capture the market's full returns. In other words, don't let fear hold you back. Play the game when it is "on". Laugh all the way to the top. Let the finger-waggers wag, they always do when people make a fortune with little effort. Corrections are inevitable and regular. Expect a big one every ten years (50%), and a tradeable one every three years (10-20%). And regular 5% corrections. When to Hold, When to SellYou have to be decisive. The stock market is not about certainty ahead of time. You never get that. Work on the balance of probability. If the market has gone up a lot and suddenly drops, the balance of probability suggests that that's a top. So sell. Yes, it may be wrong, but if the market is up a lot, there are more profits to be taken, and your only risk is not making money and not being a fund manager; underperformance is irrelevant. Play the odds. Sell when it could/should/might be a top. On the other hand, recoveries take much longer. In every major sell-off, it takes far longer to recover than it does to crash. After the pandemic, the market took 14 months to recover from a 23-day drop. That means you have plenty of time to buy into the recovery - there's no rush to catch the exact bottom. The market never crashes "up". So never bother catching the knife. I roll my eyes at people buying anything that's dropped a lot whilst it is dropping. Sell quickly, but buy at your leisure. The Myth of Defensive Stocks in a Sell-OffDon't bother buying into defensive stocks when a correction starts. Defensive stocks (TLS, WOW, COL, CSL, COH, ORG) will likely underperform in a bull market and, while they hold up better in a downturn, they still fall. You just lose money more slowly. So don't buy them. Don't read the articles saying "Switch into defensive stocks". Any talk about defensive stocks is aimed at fund managers, not you. You do not need to outperform. Cash is your only defence in a falling market. Not defensive stocks. Defensive stocks will not serve you unless you are an income-focused investor in a bull market. Leave defensive stocks to the fund managers who concern themselves with their own relative, not actual, performance. For an individual investor, there is almost no point at which you would want to buy a "defensive" stock. They make less money in a rising market and there is no point holding the stock that loses you less money in a correction. Why Holding Cash Is More Powerful Than You ThinkNo one in the finance industry will tell you to sell. Fund managers, financial planners, and brokers - they want you in their fund, in their product, in their system, not trading, speculating, or being active. If you want to move to cash, expect resistance. If you want to sell, you will need to be assertive. When my Mother-in-Law rang her financial adviser in January 2008 to say "Sell'" (the seven dull managed funds he had her in), he gave her every line in the book about it being time in the market. The market then fell 44%. Get it? If you want to sell, be assertive. And remember, there's nothing wrong with holding cash. Cash is always king. There is nothing wrong with cash, ever. Even if you get the timing terribly wrong, all you miss is "not making money". You can wear that. Plus cash gives you time to think. Being in cash is riskless. You have all the power. You can buy back tomorrow. Do not be fearful of going to cash. It's no biggie. It's actually very cathartic, especially when things get wild. You are going from worrying about the market falling, your wealth disappearing, and your standard of living changing for the worse to waking up hoping there's a crash! Selling is a powerful thing. It's a pressure release for the investment brain. You should try it sometimes. Author: Marcus Padley |
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