The last month has seen the S&P/ASX 200 (INDEXASX: XJO) lose 2.2% – hardly a catastrophe but it is pause for thought, particularly considering the growing chorus of market commentators who are suggesting the market is well and truly due for a correction.
A falling market should be no cause for panic – in fact the contrary is true. A correction should be embraced as an opportunity to purchase stocks at even cheaper prices.
Here are three things you can do to benefit from a falling market –
- Hedge your portfolio by holding cash – hold gold too if you think that will help but cash works just fine without the guesswork of what the fair value of an ounce of gold should be. Importantly, if you're going to hold cash you need to do it before the market falls which means you need to have patience and be comfortable with the potential drag on your performance when a market is rising. Warren Buffett's Berkshire Hathaway currently holds around $50 billion in cash – it may not be burning a hole in his pocket but it is subduing the company's performance.
- Corrections are often fast and can be brutal. You might think you'll time it perfectly – perhaps you'll get lucky – but most likely you won't! Therefore whether you decide to hold cash or not, other forms of liquidity are worth considering. This can take the form of large capitalisation, blue-chip stocks such as Telstra Corporation Ltd (ASX: TLS) and Woolworths Limited (ASX: WOW), or high dividend-paying stocks that can sustain their dividend, even in the face of a severe downturn.
- The third is perhaps the most important thing to do in a falling market – don't panic, the end in NOT nigh. It's time to remember the advice of Winston Churchill to 'never let a good crisis go to waste'. Corrections are an opportunity to be seized – get busy buying stocks at more attractive levels and improve the quality and upside of your portfolio's holdings.
