• It’s pointless to worry about corrections because, by definition, they’re unforeseeable. The foreseeable is always baked in. Corrections could come anytime from just about anything. Imaginable causes might include: more severe new coronavirus variants unfazed by existing vaccines, the Fed’s hinting that sustained, large increases in inflation are in the offing (followed by Wall Street’s concluding that interest rates will rise sharply), trade pressure from China, or wars breaking out. And there’s an infinite flock of black swans: a big junk-bond-supported company declaring bankruptcy, the sudden death of President Joe Biden, a flash crash (like the one in 2010) triggering institutional trading algorithms and sending the market spiraling downward; or just irrational herd selling triggered purely by investors’ fears of other investors’ fear-driven behavior—fear of fear itself.
• From destruction comes rebirth. When corrections burn values, this leaves the market floor fertile for companies to grow back. The opportunity to harness this recovery by buying the dip, while retaining existing holdings that will also rebound, is the great thing about corrections; they are opportunities.
• Be ready to act when the market corrects—to buy shares low. For many, this mentality may be counterintuitive, like running into a blazing building. But that’s what firemen investors do: They go into the fire to buy damaged shares. Or, try this nautical metaphor: It takes a tempest to get deep discounts on shares. There are no great deals when the water is calm.
• To buy low, keep some powder dry. But how much? Too much cash on the sidelines may mean missing out on gains. Too little may render investors unable to take sufficient advantage of narrow windows of depressed values. A good rule of thumb for many individuals is about 10%.
Getting through to clients in fearful times can be tough, so it’s better to have these discussions now to prepare them emotionally for the next correction.
Dave Sheaff Gilreath is co-founder and chief investment officer of Sheaff Brock Investment Advisors and Sheaff Brock Institutional Group in Indianapolis, which manage more than $1 billion in assets nationwide.