Market Corrections: Buy, Sell Or Ignore?

Lately it seems like the stock market is more volatile than ever.  Whether it’s a crisis in the Middle East, a Chinese asset bubble about to burst, a natural disaster or an environmental catastrophe, the stock market sits on pins and needles waiting for the next event to send it into a tailspin.

After the stock markets crashed in 2008, the Spring of 2009 provided us with one of the best buying opportunities of our life time.  While that particular market crash lasted over 6 months and perhaps offered a more obvious time for investors to buy (with bank dividend yields approaching double-digits), other world events have been producing smaller stock market corrections that offer potential bargains for the opportunistic investor.

Time To Buy

Major world events often lead to panic in the stock markets, with a “sky-is-falling” type of fear that produces short term sell-off’s.  Opportunistic investors have often been rewarded by purchasing out-of-favour stocks.  Buyers who enjoy these market corrections will typically hold a cash reserve or a margin account to take advantage of potential bargains.

An example of a stock specific world event leading to a buying opportunity was the British Petroleum oil disaster in the Gulf Coast last year.  BP stock reached a 52 week high of $60.98 on April 15th, 2010.  On April 20th, an explosion at the Deepwater Horizon drilling rig caused a massive oil spill that lasted for months.  BP obviously took a lot of heat over the incident and their stock was beaten up, falling to a low of $26.75 on June 28th.  BP stock has recovered by about 70% since the late June lows.

Time To Sell

In some cases an event can lead to a justified decision to sell.  Something may change in the fundamentals of a business you own, or you may not feel comfortable owning a certain asset class any longer.  Selling in a panic is not a smart strategy, but if the investment no longer fits with your overall plan it might be a good idea to sell and move on.

When Manulife Financial slashed their dividend in half back in August 2009, dividend investors were shocked to say the least.  A staple in many dividend growth investing portfolios prior to the recession, MFC was now a fire-sale in the stock market.

Time To Ignore

With stock specific market corrections investors have an opportunity to evaluate the individual situation and decide to buy, sell or ignore.  This proves more difficult with a broad based market correction, where many economic factors are in play.

The recent events in the Middle East and in Japan have led to a small panic in the markets, but for an investor with a long term view this volatility will only be seen as a tiny blip on the radar.  Ignoring these types of market corrections is likely the best approach because trying to time the market rarely works out in your favour.

Often the best strategy in most situations is to simply wait.  It works for preventing impulse shopping and it will work to prevent you from making a hasty decision without learning all of the facts.  Stick with your plan and don’t let the media noise and market volatility trick you into making a mistake.

Back in December I took advantage of a temporary sell-off and purchased some BMO shares after they fell 7% following a large acquisition.  But I had some cash reserves and was already hunting for a stock to add to my portfolio.

How do you approach market corrections to individual stocks or to the market in general?


6 Responses to Market Corrections: Buy, Sell Or Ignore?

  1. Ignore most of the time I say.

    Unless the world is ending like the Mayan calendar says it will next year, might as well buy and hold everything :)

    BTW – love the clean look. I have to get my act together and run my blog on WordPress! My goal for 2011.

    Cheers,
    Mark

    • Hi Mark, I tend to agree about the holding forever part but lately I have been looking for some bargains to buy. I noticed you have made a few purchases lately.

      Thanks for the feedback!

  2. Buying is relatively easy. To let go is the hardest. At one time my portfolio was up 80% before some of it dived to the ground for apparently no reason. I never thought about selling when I was 80% ahead.

    Buy, Sell or Hold are three of the hardest phenomena ever discovered. We always buy when the market is at its peak, we sell when its down and when it’s time to sell we hold.

    • You’re right Doable, we always seem to get it wrong (or we just think we will). If I sell a stock I try not to pay attention to where it goes afterwards. Buying can be easy, but not when you’re really looking for a bargain. You can second guess yourself to death.

  3. Congratulation for having this article featured in the carnival of value investing. Investors should always have cash reserves available for purchasing stocks at bargain. Most investors should never use margin accounts to buy stocks.

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