5 Steps to Preparing for a Stock Market Correction

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Stock market corrections are unavoidable. While they tend to catch investors off guard, they are quite a common occurrence. As worrying as they may seem, market corrections can offer an excellent opportunity to buy stocks at a discount.

That’s because a broad drop in stocks often lowers the prices of traders’ favorite investments for a certain amount of time until the indexes bounce back to new highs. If you think that a stock market correction is about to happen in the short term, there are some steps you can take to anticipate the decline.

Lock in Some Profits by Selling

One way to prepare for a correction is by selling some of your investments that performed well or are trading close to their highs. This way, you can keep the principal amount you invested from the beginning.

Another option would be developing a selling plan that states when you should sell stocks and eliminates any emotion from the decision. This approach can help ease any concerns you may have regarding a selloff.

Diversify Your Portfolio

Diversification is always excellent for striking a balance between risks and rewards in an investment portfolio. Ensuring you have a good mix of assets that move differently is another strategy that can help you weather a volatile market.

Bond funds or commodity-oriented exchange-traded funds (ETFs) are some investments that can instantly diversify your portfolio beyond stocks. You can also add in value stocks since they generally pay dividends, allowing you to continue receiving returns even if a stock’s price goes down.

Be Wise with Your Decisions

Small investing decisions can have a significant impact on your portfolio, especially during a volatile market. Therefore, one crucial thing you should do is to place limit orders. That way, you can set the price you want to buy or sell assets, and the trade is only carried out at the price you have determined or better.

Always Think of Your Investing Goals

Keep in mind that you’re investing to turn a profit and not hold investments for the rest of your life. While market corrections usually only last for a short time, they can give some investors quite the shock.

By selling some of your stocks in advance, you can minimize the risk and reinvest the money for less the stocks’ prices if a correction does take place. That also keeps you from selling shares at an undesirable price.

Having a plan before a selloff enables you to make rational decisions once the market turns volatile.

Perform Technical Analysis

Taking a look at the technicals of a stock can offer vital information about how the stock performed in similar conditions and what you can expect looking ahead. With technical analysis, you can identify overvalued stocks and leave their positions before a market correction.

Indicators such as price gaps, volume shelves, and moving averages can provide you with hints about the future. This type of preparation can help you survive a stock market correction or welcome one if you have a long-term horizon.

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