There is plenty of bearish talk out there regarding the stock market, yet so far there has been little action to the downside. According to a recent CNBC article, "Jack Bouroudjian, CEO of financial services holding company Bull and Bear Partners, told CNBC's Asia Squawk Box on Tuesday he was the most bearish he has ever been on the U.S. stock market.
"The market is overvalued and we've hit an inflection point. Unless we see some real strong growth numbers coming out of the economy, I'm looking at a 10 percent correction between now and October. It's time to be very defensive," he said.
Personally, I'm just about always ready for a stock market correction. My strategy? Do nothing.
Cash in on stability
Inflation -- according to the government at least -- is low right now and so are the rates of return on many safer investments such as savings accounts, money market funds, certificates of deposit, and savings bond. However, I'd rather earn a little than lose a lot. Therefore, I'd just as soon stash any additional cash outside stock market based investments, accumulating some additional cash in secure spots like a savings or checking account and just sitting tight since a market correction might provide buying opportunities in other areas that could require quick cash to jump on.
A market correction could lead to worries about retirement accounts for many people, especially those who are nearing retirement. I can't blame them for these concerns as a 40 or 50 percent drop in account balance just a year or two away from retirement could be disastrous. If I were in such a situation, I'd probably be moving much of my retirement account balance more toward bond/cash holdings…however, I'm not.
With probably another 30 years before I need to start drawing on my personal IRA, I'm content to let it sit through a market correction. This is largely because I have my IRA in a dividend reinvestment plan that's spread between stocks, bonds, and cash and that rises and falls with the stock market. The upside though, is that every month that fund pays a dividend that is reinvested as shares in the plan and that yields around 6 percent annually. This helps me dollar cost average over time; and buying shares when the market tanks means buying at cheaper share values, which can increase my fund balance when the market moves higher.
A market correction can also be a great time to bolster reserves. Waiting for the bottom to hit can take some time in a faltering market, and while I'm not one to try to guess tops and bottoms in the stock market, I'm not one to jump in too quickly either.
Personally, I find nothing wrong with sitting back, biding my time and letting things take their course for a bit while I bolster reserves. A tumbling market can bring with it economic uncertainty in other areas and have repercussions outside those we might have considered. Having additional emergency savings on hand can help guard against some of these unconsidered circumstances such as loss of job, higher inflation, or just general issues that can't be delayed such as major home repair or vehicle replacement.
Therefore, I'm fine doing nothing when it comes to the stock market if or when there is a major correction. If a buying opportunity presents itself then so be it, but I'm not going to put myself out there too far to try to "catch a falling knife" as those on Wall Street might put it.
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The author is not a licensed financial professional. The information provided in this article is for informational purposes only and does not constitute advice of any kind. Any action taken by the reader due to the information provided in this article is solely at the reader's discretion.
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