This past week, the Dow Jones Industrial Average (^DJI -0.11%) set new intraday and closing records a few different times. A number of its components are trading near their all-time highs, as individual stocks and the major indexes just keep climbing.
But while investors' net worth continues to increase, it's hard not to think about the possibility of a correction -- which I think is pretty much inevitable. Historically, the markets have fallen 5% three times over a 12-month period, 10% once a year, and 20% or more every three and a half years. A 5% correction to the downside is therefore never more than four months away.
A correction isn't something to fear. Think of it less as a decline in your net worth and more like a good sale at your favorite store. When you can embrace looking at corrections this way, you've taken the most important step toward preparing yourself for market downturns.
While a 5% correction may not be what investors would consider a good buying opportunity, the once-a-year 10% correction or even the 20% or more decline should create a few attractive candidates. And that's what you need to be ready for.
How to prepare yourself? Start saving money, so that once a correction starts serving up buy opportunities, you can take advantage without having to sell your existing positions. A correction isn't a good time to sell.
But don't use up that cash in the meantime. In a market where everything keeps rising, like the one we're seeing now, the thought that you can't possibly pick a loser begins to creep in -- and before you know it, all your cash is gone before the correction ever begins.
Allowing yourself some time to mentally and financially prepare for a correction can not only save you a lot of heart ache and anxiety, but it could save you thousands of dollars as you buy shares when they go on sale. You can't place a dollar amount on minimizing your investing stress, but you'll certainly see the dollars flowing into your investment account if you prepare and stick to a market correction plan.
