Daily Gains Letter

Weathering the Storm: Three Tips for Outlasting the Eventual Stock Market Correction

By for Daily Gains Letter |

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“Buy low, sell high.” It seems so easy. Could there be a more simplified (read: misguided) piece of investing advice out there? In this economic climate, many investors who want to come in off the sidelines are wondering if a better adage would be, “buy high, and sell higher.”

On the other hand, after an explosive ascent, other investors are waiting patiently to buy on the eventual dip. The big question, of course, is when will there be a dip or market correction (a pullback of 10% or more) for investors to take advantage of?

It’s not as if there isn’t enough of a global impetus to drive a market correction. The U.S. is racked with massive debt and high unemployment, gross domestic product (GDP) growth has been revised downward, consumer confidence is down, retail sales are down, and personal debt is up. Building permits have declined since January, while foreclosure rates are picking up.

Not surprisingly, poor economic numbers are finally catching up with the red-hot S&P 500, where 78% of the listed companies have issued negative earnings per share (EPS) guidance. U.S. first-quarter corporate earnings results are trickling in, and it’s not looking great—Bank of America Corporation (NYSE/BAC), Yahoo! Inc. (NASDAQ/YHOO), and Intel Corporation (NASDAQ/INTC) all disappointed.

Then there are the global economic indicators. Jens Weidmann, the head of Germany’s central bank, said it could take 10 years for Europe to recover from the debt crisis. Those ever-optimistic bulls need only look to Cyprus to be reminded of the fragile state of the eurozone—and how the global markets would respond if the local governments (Italy, Spain, etc.) followed Cyprus’s lead. Speaking of fragility, let’s not forget about North Korea and Iran, as well as the weaker-than-expected growth in China.

How, then, with all the negative economic indicators, can the S&P 500 and the Dow Jones Industrial Average still continue to chug along with nary a hiccup? It clearly doesn’t have anything to do with earnings.

No, the current euphoria on Wall Street is a mirage, propagated by the U.S. Federal Reserve’s unabashed love of money printing and low interest rates.

Eventually, the flimsy stock certificates holding Wall Street up will take a well-deserved hit. The big question is: when? Even though corrections are a healthy part of Wall Street, this one has been put on hold.

Investors looking to get into the uncertainty of this market should consider a few of these defensive strategies to protect themselves against an eventual market correction:

Dividend Stocks: In spite of all the talk about dividend stocks being in a bubble, they’re still a great investing avenue. While dividend-yielding stocks have been on a tear, it’s correlated with record-low interest rates. And with companies sitting on hoards of cash, there’s no reason to think they can’t continue to pay out for a long time to come.

Slow and Steady: By gradually buying stocks, you can limit your exposure to a market correction. If a correction occurs, you can pick up excellent stocks at great prices. If a market correction doesn’t occur, your investments will continue to make you money. Go all-in at once, and you significantly limit your options.

Think Global: Buy great stocks, no matter where they are. To help manage risk and add diversity, investors should consider international stocks. There are a lot of excellent, profitable, fundamentally solid companies trading in Australia, Britain, Canada, Germany, etc.

The long in the tooth bull market may be plugging along, but that doesn’t mean investors should jump in with reckless abandon. “Slow and steady” may be one of the best investing mantras out there right now.

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