There's been a lot of talk lately about a market correction laying just around the corner.
After all, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) Index reached a six-year high last week, giving it a remarkable gain of more than 85% since early 2009. We're certainly long overdue for one!
While a number of stock market commentators have forecast the index to climb to the 6,000 level within the coming months, we have seen cracks start to appear more recently.
The index has already retreated 122 points or 2.2% since Thursday and earnings reports in the US haven't been quite as strong as the market had been hoping for.
Also playing on investors' minds are the Argentinian debt default as well as threats of war around the world – for example, in Russia and then on the Gaza strip. With all that in mind…
We could even be on the verge of a stockmarket crash!
Don't go running for the exits though – that would be the worst thing you could do right now.
After all, no investor ever got rich from selling out of panic!
What you need to do is prepare yourself for whatever situation plays out. That is, whether the market falls 10% or 50%, or whether it continues to rise to that 6,000 point level some analysts have predicted.
Here are a few things for you to keep in mind:
- It can be tempting to throw all your money into the stock market, but it is important you keep a cash reserve. Not only does this protect some of your wealth from a market plunge, but also empowers you to buy stocks when they are at their cheapest!
- Don't focus on the near term. In fact, try get into the habit of not checking the market everyday! Instead, set your sights on the long-term horizon and trust your judgement on the companies you've invested in.
- Reconsider your portfolio allocation to a level of diversification you're more comfortable with.
- Ensure your portfolio maintains a strong foundation, made up of resilient blue-chip stocks.
It is that last point I wanted to go into a little further depth on today.
Holding blue chip stocks might not seem as exciting as only exposing yourself to growth or speculative companies, but their defensive nature and strong dividend yields are what can be the difference between your portfolio crumbling, or coming out the other side relatively unscathed.
Right now, I'm certainly not talking about companies like Commonwealth Bank of Australia (ASX: CBA) or Westpac Banking Corp (ASX: WBC). In fact, if a market crash were to occur, they could well be amongst the hardest hit given their excessive valuations.
Instead, I think companies like Coca-Cola Amatil Ltd (ASX: CCL), Crown Resorts Ltd (ASX: CWN) and BHP Billiton Limited (ASX: BHP) could be much better bets for investors wanting to strengthen their portfolios.
While Coca-Cola Amatil and Crown are both sitting well below their 52 week highs, BHP Billiton also appears to be trading at a reasonable price. As it continues to improve productivity and reduce costs, it could certainly be a solid bet for investors over the long term.
Now's your chance to make a stock market fortune
These times can be incredibly testing, and indeed terrifying for investors. No one likes to watch their portfolio plunge in value! However, these market drops can also be the greatest time to start building your personal fortune by buying stocks at their cheapest, and then letting them compound in value over the long run.
