What to do with the current stock market “correction”?

May 17, 2012 | By Fitz | Filed in: Current Events, Investing.

I’ve been hearing a lot of buzz with the ongoing correction in the stock market. I would like to know your opinion regarding this? Is it a good time to buy stocks? How long will this take before the stock market normalize again? and Since i’m new to investing how often does this event happen in a year or should i ask does this happen every year? (Pardon me if im not asking the right question :P)


9 Responses to “What to do with the current stock market “correction”?”

  1. Fitz says:

    Hi MondC, a market correction is normal because those who invested early, when prices are low… are now taking their profits.

    Moreover, there is no exact cycle for these market patterns – meaning the correction could take a month, a quarter, a year… and it does not follow a time frame because it all depends on investor sentiment.

    If you’re a long term stock market investor (5 years or more investment horizon)… my advise is to observe the market. Wait until prices reach near-support levels and start buying stocks by then.

    Of course, if you’re doing a cost averaging strategy, then there’s nothing you should do but just continue buying.

    Lastly, if your portfolio already has considerable gains, it may be good to put a stop order to minimize market losses. For example, if your 5-year stock investment is 80% up and you might need the money within a couple of years, then sell your portfolio at 50% price gain – just to be on the “safe” side.

    Anyway, I hope others could share their thoughts here also. Thanks for this excellent question. šŸ˜€

  2. ForsakenOne says:

    Agree, with Fritz.

    I’m more of a risk-taker though. If you have a lot of money ust lying around, i suggest to keep buying:

    1. Get info:
    Newspaper reports (at least in star and PDI – not sure about abante:D) usually feature quotes/analysis from different fundmanagers and they mention support levels ansd resistance levels. i use this as my “for-dummies” guide. They aren’t always accurate, but they are genrally true so far (since i started observing in Dec-January).

    2. Evaluate your funds
    Determine how much money you can gamble with. You probably know how to do this already, so on to the next…

    3. Cost average
    Depending on how much money you have, and how often you can read the news and watch the market you can choose to trade weekly, monthly, every two months, etc.

    Personal suggestion:
    You can’t predict how long corrections last, but history does show that the months of May onwards is usually a down cycle for stocks (again, not a certainty but genrally true for still unproven reasons -like fund managers are out on vacation for the summer).

    And then stocks tend to go up in Decemer (also uncertain but generally true – for unproven reasons again like people spend more and the economy goes up)

    So try to stretch out your fund across that May-Nov period. Cost averaging over that period should be enough. Though you can always try to wait for the downswings (caution: from personal experience, nerve-wracking and minimal chance of success -but then again i dont do technical or fundamental analysis).

    But then again, if you wont be selling the stocks, just keep buying… choosing a good company would be more improtant than choosing when to buy, if you’re a long term investor.

  3. MondC says:

    Thanks Sir Fitz and forsakenone. Anyhow, what do you mean by near support levels? Also, does cost averaging applies with mutual funds?

  4. ForsakenOne says:

    I’m not an expert, but from what i understand:

    Stocks fluctuate, but they tend to do so at a certain range. For instance, the sotck market goes up and down but may stay in the 5,000 to 5,100 range. 5,000 then is the support level and 5,100 is the resistance.

    When the range goes above the resistance, it can mean that the market will start to fluctuate in a new range (maybe 5,100 to 5,200).

    When it falls below support levels, it can mean the opposite (market may trade in the 4,900 to 5,000 range).

    How the support and resistance is calculated is called technical analysis. Depending on your broker, you might be getting this information already. (BPITrade clients don’t, maybe Citisec clietns do).

    Stocks of individual companies also behave like this (but of course, not necessarily in synch with the PSE index).

    Near support would be near-bottom prices. You’ll have to do your homework though to figure out what would be a near-bottom price.

    Cost averaging also aplies to mutual funds. Unfortuantely support and resistance (as it applies to stocks) does not exist in mutual funds. So to cost average in mutual funds, just buy regularly for a certain period.

    You may invest 1K weekly in an equity fund, trying to take advantage of an ongoing correction. the NAVPU of an equity fund is generally atuned to the stock market; market down, navpu down; market up, navpu up.

    Or save yourself the hassle and invest 4K monthly until maybe October. And if you really have extra money, invest extra if you notice the navpu is the lowest or one of the lowest you have seen so far. Of course, that entails the hassle of observing the navpu and taking notes.

  5. MondC says:

    Thanks Forsakenone. I think i have a lot of homework to do since my portfolio is just in the mutual funds šŸ˜›

    As for the cost averaging, I think the hassle will just be the one time fees (management / sales load fee & etc) as this will affect your total amount of investment.

  6. ForsakenOne says:

    Hey MondC,

    Since you mentioned fees, i do have another tip for you. Specifically for long-term investing (i’m assuming you have at least one account for that).

    If you have a mutual fund – and it’s a long-term-until-I-retire-type-of-investment – the biggest factor may be the management fee.

    The basic logic is, good mutual funds typically have a comparabel rate of return over the long term. But if one fund charges you 2% while the other just .5 or 1%, over the long run the you might get more in the end from the low-cost mutual fund even if it slightly underperformed compared to the high-cost fund.

    search yahoo for “6 Money Mistakes Everyone Makes mutual fund fee” to see that I mean. The example is for the U.S. but the math holds true for any currency. And mutual fun logic is practically (if not actually) the same regardless of currency or location.

  7. MondC says:

    Nice. Thanks for the tip Forsakenone.

  8. al samson says:

    To know more about stocks and stock investing, you can visit our PSE Website- http://www.pse.com.ph and PSE Academy Website- http://www.pseacademy.com.ph .We hope that we could help you give information to your readers about basic stock investing. Thank You.

  9. ForsakenOne says:

    You know you made it big, when PSE peeps come to your webist to get customers šŸ˜€

    But kidding aside, probably a good idea (if there’s no cost) to get the low-down from PSE itself. Most of us (at least in my assumption) are technically amateurs anyway. If the professionals wanna give free advice, why not?

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