Correction in financial markets: what we should never do

4 things we shouldn’t do and 5 things we should have already done

Summer season is historically known to be the best time for corrections in financial markets and the 2015 summer was not an exception: the third week of August the market experienced a “correction” above the 10% (higher than a 10% are considered corrections). Many investors wonder what to do when their assets fall.

At least there are 4 things we shouldn’t do:

-Don’t get obsessed with the news:

As a result of such events, newspapers and television are full of headlines. However, what they don’t tell is that markets have a natural increasing tendency over time and that they rise much more than what they’ve fallen.

The best thing to do is not to get too hung up on the daily fluctuations and stop checking our portfolio constantly. At the end, markets commonly have fluctuations: remember that investing in stocks is called equity and investing in bonds is understood as fixed income.

Avoid panicking:

Historically, interest rates have been low and will continue like this for a long time. Up to now, there hasn’t been an alternative to equity. On the other hand, markets are not cheap, especially the American market; the European market is cheaper and there are still many companies with long-term growth opportunities.

In any case, corrections mustn’t be a reason to sell good companies (bad companies should have been sold long time ago).

Don’t be complacent

These situations test our attitude as investors.

They are also an excellent way to measure our risk aversion.

Are we really prepared to bear these falls?

Is our portfolio a good reflection of our risk tolerance?

Have we invested the money we might need in the short term?

These situations are a great opportunity to go over our strategies and attitudes in order to adapt our economic situation and risk tolerance to reality. There’s nothing more real than to see ourselves losing 10% or 15% in a week. Let’s see if we continue to sleep at night.

Don’t try to know more than everyone else

After a 10% drop, nobody really knows what the market will do next. Don’t waste time listening to that “expert” who explains what is going to happen. Chances are that if they really knew, they wouldn’t devote themselves to this.

The reality is that after a 10% drop there can be another 15%, 25% or 50% drop or the opposite, which would suppose there’s a rebound and rates are high again. Moreover, let’s not be obsessed with the word correction. The definitions are not a dogma of faith: there are those that speak about correction starting at a 5% drop and others when it is a 15% drop. The truth is that what happened in this third week of August means nothing and a 10% market decrease is not important by itself.

So our best advice is to be patient, take into account diversification and learn about the investment attitude and gain psychological strength. To accomplish your objectives we highly recommend you have an investment plan.

That plan must include:

This is the pyramid of priorities that an investor should consider in order to create their plan.

The fact is that ”in the world of investments the secret is that there is no secret”. Investors just need to do 5 things well as we already described in our article Start investing.

– Don’t allow impulses to rule your decisions

– Patience: time is your ally

-Minimize costs and fees

-Have an investment plan

-Stick to your plan no matter what happens

These 5 commandments are conditioned by two previous rules:

-Never invest money you might need handy in a short-term

At the same time, nowadays there’s evidence that there‘s no other alternatives for our savings (beyond what we might need for our daily lives, plans and unexpected events) therefore:

-Investing has become a necessity: if we don’t want to lose earning power.

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