5 Ways to Protect Your Portfolio in a Stock Market Correction

When the stock market slides between 10% and 20%, it’s called a correction.

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When the stock market slides between 10% and 20%, it’s called a correction. You may not recall the last one because it ended in February 2016, shaving 14% off Standard & Poor’s 500-stock index. Corrections occur an average of every 26 months in a bull market, but waiting times have sometimes been far longer — or shorter.

Some strategists say stocks look pricey, setting the stage for a potential fall. The S&P 500 trades at about 24 times corporate earnings for the past 12 months. That is more expensive than the market has been 90% of the time since 1928, says Jim Stack, president of InvesTech Research and Stack Financial Management. “This is one of the more overvalued markets in history,” he says. “It carries a high degree of risk.”

That doesn’t mean stocks can’t keep climbing. Corrections within a bull market are often temporary reversals that end after a few months. (If a correction extends beyond a 20% drop, it turns into a bear market). Many strategists say the current bull market is supported by a healthy economy, modest inflation and interest rates that remain near historic lows.

Still, if you’re nervous about a correction, here are five moves you can make now, potentially saving you a bundle if the market starts to skid.

Disclaimer

All prices and other data are as of September 5, 2017.

Daren Fonda
Senior Associate Editor, Kiplinger's Personal Finance
Daren joined Kiplinger in July 2015 after spending more than 20 years in New York City as a business and financial writer. He spent seven years at Time magazine and joined SmartMoney in 2007, where he wrote about investing and contributed car reviews to the magazine. Daren also worked as a writer in the fund industry for Janus Capital and Fidelity Investments and has been licensed as a Series 7 securities representative.