The S&P 500 is up 185% since troughing in March 2009 and it has been almost 3 years since the market experienced a 10% "correction". As shown in the chart below, each of the major rallies over the past 15 years have been followed by a significant correction. Historically, market corrections (defined as a stock market decline of 10% or more) happen approximately every 2 years on average, but the million dollar question is… will we finally see one in 2014?
Corrections can actually be a really great thing for an investor if they are properly prepared. In fact, our investment strategy is built on buying great stocks at good prices. If the market never experienced a correction, we would never get to buy our stocks "on sale". So in a way, we would welcome a nice healthy pullback with open arms. Below is a checklist for investors to consider as they prepare their portfolio for a potential correction. 1. Stay Calm (i.e., don't freak out and sell all of your stocks!) 2. Selectively Raise Cash (you will need some cash to shop with) 3. Consider Hedging Your Portfolio 4. Build a Watch List Of Stocks You Would Like To Own 5. Establish a "Buy Zone" For Every Stock On Your Watch List.
Source: Seeking Alpha
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