The market has been soaring for the last year and a half, but with its recent tumble, some investors are worried that we're on the verge of a correction -- or worse, a full-blown crash or recession.
As of this writing, the S&P 500 has fallen by more than 5% from its peak in mid-July. While alarming for some, that doesn't yet reach the threshold for a correction -- which is defined as a fall of at least 10%.
Nobody knows whether stock prices will continue to drop, but we do know that a downturn will hit eventually. The market can't surge forever, so we're bound to face a correction at some point. Here's how I'm preparing my portfolio for whenever that happens.
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1. I'm double-checking that my investments are still strong
Plenty of stocks can thrive when the market is surging, even if they're not the healthiest investments. Market downturns are a test for stocks, though, as weak companies will struggle to pull through tough economic times.
Right now is a prime time to comb through your portfolio and double-check that every stock still deserves its place. Companies can change over time, and even if a stock was a strong choice when you bought it, that doesn't necessarily mean it's still healthy. If you find that a stock has some major weaknesses, now may be the best time to sell while prices are still high.
There are many ways to determine whether a stock is a strong investment, but it boils down to fundamentals . If a business is run by a leadership team with a history of smart decisions, its financials are in order, and it continues to build on its competitive advantage in its industry, for example, it's far more likely to thrive over time.
2. I'm continuing to invest consistently
It can be tempting to wait to invest until the market stabilizes, but realistically, that's never going to happen. Stock prices will always be volatile to a degree in the short term, and the longer you wait to invest, the more valuable time you'll miss out on to let your money grow.
To take the guesswork out of when to buy, I use the strategy of dollar-cost averaging . With this approach, I'm investing a set amount of money on a regular schedule throughout the year. Sometimes I end up buying when prices are at their peaks, but other times, I can snag stocks at lower prices.
In an ideal world, we'd all invest when the market is at its lowest point and stocks are steeply discounted. But that's not realistic. To give your money as much time as possible to grow, it's best to invest regularly and try not to get caught up in the market's short-term fluctuations.
3. I'm looking for new investment opportunities
The market has been reaching new all-time highs all year. While that's exciting, it also makes it an expensive time to buy. One silver lining of downturns is that you can snag high-quality stocks for a fraction of the price.
While it's wise to invest consistently anyway to take advantage of dollar-cost averaging, it can be wise to invest more heavily when prices are down.
The best time to start researching potential investments is before the next correction begins. Even strong stocks will likely take a hit during a market slump, but if you've already done your homework and know that a particular stock has solid fundamentals, you can jump on those lower prices immediately.
It's unclear when the next market correction will begin, but the sooner you start preparing for it, the better off you'll be. By adjusting your portfolio as necessary now, you can weather any storm the stock market throws at it.
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