#17 How to be prepared for inevitable stock market corrections
Sharemarkets can drift seemingly higher and higher without a hitch for many years, then one day due to sudden turbulence, markets will often ‘pop’ and correct. How can an investor be prepared for such unforeseen events?
Long term investors learn from experience that stockmarket sell offs happen on a fairly regular basis. These corrections, crashes or bear markets – as the media often likes to refer to them as - are an unfortunate, but inevitable part of every stockmarket cycle.
Corrections in the sharemarkets are a self-cleansing mechanism which occur to rid the markets of the speculative excesses generally built up as markets rise to new highs.
One can never accurately predict the timing of such corrections although many similar symptoms often exist before a correction occurs - such as high stock valuations, increased speculative activity in poor quality companies and general investor apathy.
In addition, markets tend to sell-off and correct far more quickly and often fall further than many investors expect, as we saw recently when the ASX 300 dropped -13% in the 4 months from 29 August to 21 December 2018.
The truth is that most corrections catch many investors off-guard, occurring when most investors least expect them.