Investors have had to deal with volatility in the Nasdaq Composite (NASDAQINDEX: ^IXIC) for several months now, as fears about macroeconomic factors have pushed many stocks listed on the Nasdaq stock market downward significantly. After an early rise on Wednesday morning, the Nasdaq gave up its gains for the day and was down 88 points to 14,419 as of 11:30 a.m. ET.
The drop brought the Nasdaq’s losses since its November 2021 high to roughly 1,800 points, or 11%. The decline of more than 10% met the official definition of a correction in many investors’ eyes, and while anyone investing in the stock market shouldn’t be surprised at a downward move of this size happening on a fairly regular basis, it has nevertheless become reasonably rare. Throughout much of the 2010s, the Nasdaq’s big advance came without big pauses for consolidation.
As a result, many investors don’t know how to handle corrections. As volatility picks up, though, it becomes even more crucial to be able to make rational responses to difficult market conditions.
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The things to keep in mind are simple. However, they’re never easy to keep in mind when your emotions are swirling in response to big losses in your portfolio. Here are a few things to do to help you survive a stock market correction.
4 things to do in corrections
The first is to make sure that you’re not overextended in your stock positions. Many investors used margin loans or other forms of leverage when the market was red-hot in order to boost their returns even further. But when downturns happen, those measures exacerbate losses and can sometimes force you to sell at exactly the wrong time. The ideal time to get your leverage in line is before a correction happens, obviously, but it’s vital to take action before things get out of hand.
Next, whether you’re a seasoned investor or you’re going through your first downturn, it’s helpful to start taking some notes. Keep track of how you react to volatility, both in terms of what investment actions you take and the reasons behind them. If you find yourself reacting emotionally to the correction, note that, too. It’s always hard to remember the fear from being in a downturn after it’s over.
If it’s been a while since you rebalanced your portfolio, take a look and see if your current asset allocation is in line with your risk tolerance. Many people who don’t rebalance regularly are surprised to find out that a rising stock market can dramatically boost the percentage of their portfolios that are invested in stocks. That leaves them more exposed to subsequent downturns than they’re prepared to handle. Rebalancing keeps your risk levels in line with your comfort zone.
Lastly, many investors are in a position in which they expect to continue to add money to the stock market for years or even decades. If that’s the case for you, keep in mind that lower stock prices are actually your friend. They let you invest more cheaply and buy more shares with each new investment you make. As a result, now’s a great time to make a wish list of stocks that you’d like to buy if they fall enough to make the price right.
Don’t panic!
As hard as it is to see your portfolio lose value, it’s all part of the natural ebb and flow of the stock market. Long-term investors have found that markets go up over the long run, and there’s every reason to believe that long streak of success will keep holding true this time as well.
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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
