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Are You Prepared for the Next Market Correction?

Written By: Peter Mastrantuono The stock marketnever travels in a straight line. As any seasoned investor knows, the stock market will frequently experience a pullback (losses ranging from 5-10%), suffer a market correction (declines of 10-20%) or endure a bear market (20% or greater declines). Indeed, since 1945 the stock market has had 23 corrections and 12 bear markets. The average correction lasted about four months and took a subsequent four months for investors to recover their losses. Meanwhile, bear markets, on average, lasted around 11 months and took 14 months to get investors back to break-even, according to Sam Stovall, a market analyst at CFRA Research.Watching your portfolio decline in value can be difficult, and it often results in emotional decision-making that can harm long-term investment success. But, trying to predict a market correction may not be a solution, as it often results in the classic (and expensive) mistake of getting out of stocks too early and getting back into the market too late.Nevertheless, there are a number of ways you can prepare yourself and protect your portfolioin anticipation of the next market correction.The most important thing is to remind yourself that timing the market is no way to build long-term wealth. If you have a portfolio built specifically to achieve your financial goals and is in line with your risk tolerance, then it’s critical that you remain disciplined (i.e., no panic selling) when stock prices sink and the talking heads speak of nothing but gloom. As with all past market corrections, the next one too shall pass.Another step you can take is to re-evaluate your portfolio, especially now that the calendar year has turned. After an exceptional year of stock market performance, your asset allocation may have become more heavily weighted toward stocks, leaving you with greater risk exposure than you may want. Now is a perfect opportunity to speak with your financial advisorto re-balance your portfolio back to its original asset allocation target.Also, consider investing in asset classes that may not currently be represented in your portfolio. By adding new asset classes, like private equity, precious metals, alternatives or emerging markets, you will increase your portfolio’s overall diversification and potentially smooth out market fluctuations.Though timing the market is rarely a good idea, no investor has ever gone broke taking profits. After 2019’s stock market performance, it would be natural to realize some gains. While cash is a very safe form of diversification to protect against the next market correction, it also represents an excellent way to take advantage of a large market decline by having the cash reserve to buy great companies at lower prices, which should accrue to your long-term financial benefit.Of course, there are a number of other ways to protect portfolios, such as using options, but these strategies should be discussed with an experienced financial advisor.Finally, if you are nearing retirement or already retired, now may be an opportunity to create cash to fund near and intermediate-term retirement spending needs, which will help you avoid one of the biggest risks to your retirement—selling stocks to generate income when stock values are depressed.

Related: Impact Investing Is Primed to Become a Bigger Force in 2020Peter Mastrantuono is a contributing writer to www.myperfectfinancialadvisor.com, the premier matchmaker between investors and advisors. Peter worked for over 30 years in the wealth management industry, focusing on retirement planning, investing, asset allocation and financial planning.