Q. How to prepare for a coming stock market correction?
A. While many pundits forecast 2015 is another up year for the stocks, the fact is stocks' are at a premium at historical levels. How to deal with a possible correction? Here are 5 steps to follow:
1. Assess your cash needs
Do you need large amount of cash soon, for example, for college tuition bills, retirement income, down payment of a house? If yes, it's time to make sure your asset allocation is appropriate to address those needs, because stock gains may have skewed your portfolio too much to the stocks, and a sudden drop could seriously impact your cash needs in the near term.
2. Rebalance if necessary
If indeed stocks are in a very high level that is no longer appropriate to your risk tolerance level (check here to assess your risk tolerance level), you should rebalance (check here to see how to rebalance), by adding short term bonds such as Treasuries to the portfolio.
3. Diversify your stock holdings
Not all sectors and companies will be hit equally in a correction. You might want to allocate more funds to blue chip stocks, for example, purchasing S&P 500 index funds, such as Vanguard or Fidelity 500 Index funds.
4. Keep dollar cost average investing
Keep investing a set amount every month or quarter, this will get you more stocks if a correction indeed happens. Do not try to time the market by investing in the absolute bottom, it's simply too elusive.
5. Take profit if possible
There is a saying - let profit run, however, if this run is over 5 years, maybe it's time to lock in gains so you have enough ammunition to catch some stocks you have been wanted to add to your portfolio but couldn't because they have been too expensive. Also, a correction might not hit all sectors equally, if you have cash ready, you can participate a sector's rolling up as it happens.
A. While many pundits forecast 2015 is another up year for the stocks, the fact is stocks' are at a premium at historical levels. How to deal with a possible correction? Here are 5 steps to follow:
1. Assess your cash needs
Do you need large amount of cash soon, for example, for college tuition bills, retirement income, down payment of a house? If yes, it's time to make sure your asset allocation is appropriate to address those needs, because stock gains may have skewed your portfolio too much to the stocks, and a sudden drop could seriously impact your cash needs in the near term.
2. Rebalance if necessary
If indeed stocks are in a very high level that is no longer appropriate to your risk tolerance level (check here to assess your risk tolerance level), you should rebalance (check here to see how to rebalance), by adding short term bonds such as Treasuries to the portfolio.
3. Diversify your stock holdings
Not all sectors and companies will be hit equally in a correction. You might want to allocate more funds to blue chip stocks, for example, purchasing S&P 500 index funds, such as Vanguard or Fidelity 500 Index funds.
4. Keep dollar cost average investing
Keep investing a set amount every month or quarter, this will get you more stocks if a correction indeed happens. Do not try to time the market by investing in the absolute bottom, it's simply too elusive.
5. Take profit if possible
There is a saying - let profit run, however, if this run is over 5 years, maybe it's time to lock in gains so you have enough ammunition to catch some stocks you have been wanted to add to your portfolio but couldn't because they have been too expensive. Also, a correction might not hit all sectors equally, if you have cash ready, you can participate a sector's rolling up as it happens.
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