Surviving Market Corrections

Once I experimented with momentum and stock trading. I'm a stock investor and stock trading is not part of my core strategy. How did I do?

Overall, I was successful. However, despite my expanding investment accounts, I felt like something was seriously wrong. Stock trading left me exposed to a potentially devastating market correction. I started losing sleep thinking about it. Despite my swelling bank accounts, stock trading simply conflicted with my personality and it left me emotionally drained. So I sold all my shares and rebalanced my portfolio focusing on value investing and corporate bonds.

I'm glad I did too. After studying macroeconomics extensively, I noticed the economy wasn't growing in-line with projections. The Labor Department reported dismal job growth and existing home sales statistics were unimpressive. Stock valuations were high! Really, really high! I felt a major correction was heading for the markets and it happened. I learned a valuable lesson from that experience. I learned I lost my way chasing momentum stocks. I became a stock trader rather than a stock investor.

A stock investor seeks undervalued securities. Stock investors intend to hold their shares long-term. Stock investors pick stocks based on fundamentals and short-term setbacks like missing earnings or revenue projections make little difference. Stock investors buy stocks based on heavy analysis while traders focus on chart movements and momentum. Luckily, I remembered who I was before it was too late.

You must understand it is incredibly difficult to hold stocks in a down market. There is something psychologically taxing about keeping your securities while the market tanks. It is gut-wrenching to watch the unrealized value of your portfolio disappear right before your eyes. What is the best medicine for this situation?

Do not put yourself in this situation in the first place. I tell newbies to take plenty of time to know who you are and learn the pitfalls of the financial markets. Fortunes are made and lost every day and buying individual stocks isn't for the faint of heart or for those unwilling to conduct heavy research and analysis.

For most people, the ability to resist hitting the "sell" button during a down market lies in their asset allocation. Try a 50/50 mix. Put 50% of your money in stocks/mutual funds and 50% in bonds. Stock and bond values tend to move indirectly proportional. This means when one goes down, the other goes up. This mix may maintain balance in your portfolio. It may keep you from doing what you never should - buy high and sell low.