Corrections are a time to get things right…again

Paul FennerPortfolio Management

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As we kick off another volatile week on Wall Street (to the downside as volatility can also mean to the upside) I came across two great articles last week to provide some perspective on the current equity market situation; Barry Ritholtz’s weekly column at the Washington Post and a WSJ article by Geoffrey Rogow titled 5 Days That Taught Investors All They Need to Know.

Here are my key takeaways from Barry’s column;
  • Have a financial plan before a crisis hits.  A crisis or an unexpected negative event can happen at a moment’s note so you must know where you stand financially in order to limit your emotional reactions to these events in order to help preserve for financial well-being.
    • Ritholtz – “Ignore the chumps telling you how much money you save by not buying lattes; that’s penny-ante nonsense. Get the big things right — your housing costs, your health care, your kids’ college savings, and then we can begin to think about your retirement. If you are a $5 latte away from insolvency, then sorry, folks, but you are already out of luck.”
  • When it comes to these pullbacks in markets be ready to take advantage of the potential opportunity.  Moments like these are why a diversified portfolio usually works best.  Yes, you give up returns when the market is blazing to the upside but what I try to provide to my clients is peace of mind when things turn down knowing they have some cash on the sidelines ready to buy at lower prices.
  • Ritholtz – “My colleague Josh Brown has a nice little trick to do during the sorts of market mayhem we saw last week. When you see market futures down 1,000 points, the way they were early Monday, pick a favoured ETF or asset class. Put in a “good-til-cancelled order” (for what you can afford) at 10 to 15 per cent below recent prices. Courtesy of the market panic, you get to increase exposure at absurd prices. You can do this with any ETF representing broader indices.”
Here are my key takeaways from Geoffrey’s article
  • If you pay too much for a stock, it won’t matter how rosy the future turns out to be; you will still lose money
  • Nobody rings a bell when the market turns either at the top or the bottom
  • ETFs that were at times billed as a cheap and liquid hedge to a broader portfolio may not be all they’re cracked up to be

Although easier said than done the bottom line is to try to keep your emotions in check when these corrections happen. No one knows how long or short they will be or how much values can change.  Have a plan, know what your financial situation is, and have faith in the plan that you have built.

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