An ASX correction could be coming: Here's what to do

This is your guide to surviving a stock market dip, according to AMP Capital chief economist Dr Shane Oliver.

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The S&P/ASX 200 Index (ASX: XJO) has lost about 3% from its most recent high about a month ago.

That would be 5% if it weren't for a mini-rally the past couple of days.

AMP Capital chief economist Dr Shane Oliver reckons "it's too early to say" whether the market has passed the bottom or if this is just the start of a correction.

The potential for giant Chinese real estate development company Evergrande to collapse had even brought out talks about it becoming a "Lehman Brothers moment" like in the global financial crisis.

"The wobbles in shares reflects a long worry list that has been building for a few months now," he said on the company blog.

"Sharp market falls with talk of 'Lehman moments' are stressful for investors as no one likes to see their investments fall in value."

Oliver does see the possibility of share markets suffering a correction this year, which is defined as a pullback of 10% or more from recent highs.

However, he reminded investors to keep an even-keeled mind during such times. Don't panic. 

In fact, he presented 7 things to remember to avoid getting caught up in the doom-and-gloom hype:

Corrections are 'healthy and normal'

According to Oliver, share market corrections happen regularly and they're nothing out of the ordinary.

"While they all have different triggers and unfold differently, periodic corrections in share markets of the order of 5%, 15% and even 20% are healthy and normal."

In fact, he presented a chart that showed the ASX 200 has had 10 dips of 5% or more in the past 10 years. Six of those were 10% or more.

"While share market pullbacks can be painful, they are healthy as they help limit complacency and excessive risk taking."

The second reason not to worry excessively is that a correction rarely turns into a major bear market unless it is accompanied by a recession.

Oliver did not think this was likely.

"While global growth is likely to slow in 2022 business surveys remain strong and global growth is still likely to be strong at around 4%," he said.

"In Australia, the delayed but now rapid vaccination program looks on track to allow a gradual reopening as we learn to live with higher levels of coronavirus through next quarter, avoiding recession ahead of much stronger growth next year."

Don't lock in your losses

Getting spooked by a correction and selling your shares is always a bad idea.

All that does is turn a paper loss into a real one, which has no chance of recovering.

"The best way to guard against deciding to sell on the basis of emotion after weakness in markets is to adopt a well thought-out, long-term strategy and stick to it."

Also, when stock prices have fallen that's a great chance to pick up some bargains.

"Look for opportunities' pullbacks provide," said Oliver.

"It's impossible to time the bottom but one way to do it is to average [them] over time."

The fifth reason to not overreact to a correction is that the market will often head opposite to how you feel.

"Shares and other related assets often bottom at the point of maximum bearishness, that is, just when you and everyone else feel most negative towards them. 

"So, the trick is to buck the crowd."

ASX yields are pretty good at the moment

OIiver said that ASX shares are handing out some excellent dividends this year, which will offset the pain from falling stock prices.

"The income flow you are receiving from a well-diversified portfolio of shares is likely to remain attractive, particularly against bank deposits."

And lastly, Oliver suggested "turning down the noise".

"In times of uncertainty, negative news can reach fever pitch. But it often provides no perspective and only adds to the sense of panic," he said. 

"All of this makes it harder to stick to an appropriate long-term strategy let alone see the opportunities that are thrown up."

Motley Fool contributor Tony Yoo has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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