How to Survive the Next Stock Market Correction

The secret to keeping your investment portfolio intact during a big sell-off is planning ahead and avoiding panic.

Stock market corrections are an inevitable part of investing. Since 1932, declines of 10% to 20% have occurred every two years, on average. The physics of the stock market haven’t changed today: What goes up can’t go up forever.

So what do you do if there’s a big drop in stock prices? If you believe the bull market has more room to run, don’t panic when it stumbles. There are a number of ways to put a downturn to good use.

For starters, beef up your buying power. As long as stocks continue to perform well, take some profits from your winners and build a cash reserve. You may also want to unload some clunkers. When the market finally sinks, use the cash to scoop up bargains.

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And speaking of bargains, you should prepare a shopping list of stocks you’d like to buy at lower prices. If, say, you want to own Apple or Google but think they’re too expensive now, be ready to act if a correction gives you the opportunity to buy them at discounted prices.

You’ve probably heard of dollar-cost averaging, a strategy of investing a set amount in the market at regular intervals. Consider a market-correction twist: Invest periodically, but use decline thresholds instead of time intervals to determine when. For example, you might put a set amount into stock funds in your 401(k) after every 5% dip.

Finally, turn off the TV. If a decline starts to snowball, you’ll hear about it—over and over. Don’t get caught up in the negative hysteria and do something foolish, such as selling all of your stocks or stock funds during a moment of panic. Odds are you’ll regret it later.

Manuel Schiffres
Executive Editor, Kiplinger's Personal Finance