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10 Lessons From the Market Correction

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This article has been adapted from our sister site across the pond, Fool UK. You probably would have figured that out for yourself after reading the paragraph containing "576p," "30 April," and "realised."

I can't say I've enjoyed the last few months of market volatility. I have seen my portfolio shed more than 10% of its value and every new purchase instantly plunges.

But I've certainly learned a lot. Ten things, in fact -- a suspiciously round number. So what can we learn from the market correction?

1. A stock market correction doesn't kill you.
My portfolio may have been peppered with buckshot, but it's far from dead. When the FTSE 100 briefly revived last week, my portfolio was soon hopping around. So yes, the correction hurts, but it isn't the end of the world. You will recover.

2. Fools rush in.
When BP's (NYSE: BP  ) broken pipe started gushing, I paid too much heed to analysts who claimed the oil major's share price plummet had been overdone, and dived gleefully in at 576p on 30 April. An hour later, watching a glum report from the Gulf of Mexico on BBC News, I realised I had been too hasty. BP's shares are now trading at 332p, a 43% drop. Only you can fully assess how much risk you are willing to take.

3. Small caps aren't necessarily more volatile.
Just look at BP. Or Aviva (NYSE: AV  ) . Or Prudential (NYSE: PRU  ) . These three fellas are all in my portfolio, and all have taken a hammering lately. My other blue chips have also seen their share prices slide. I assumed smaller companies were inherently more volatile, but it isn't always the case. Lighting company FW Thorpe has barely flickered in recent months, while all around it, big names have been plunged into darkness. Many of my other smaller, lesser-traded stocks have also stood firm.

4. You have to keep the faith.
With the FTSE 100 down nearly 30% on over a decade ago, stock markets have some explaining to do. The index is currently trading at a level last seen in January 1998, well over 12 years ago. At times like these, investors are likely to have their faith sorely tested. You just have to keep believing that markets will one day rise again.

5. The dividend is your friend.
The share price may have fallen, but at least you've got the dividend (with the odd oily exception). Over the long run, that's where you will make much of your money, especially in times like these. Now, when researching a new stock, the dividend is one of the first things I look for. And if it's low, I may look no further.

6. It's hard to defy the crowd.
Every Fool can quote Warren Buffett's maxim that you should be brave when others are fearful, but oh my!, isn't that a hard thing to do? When markets are going down in flames, your self-preservation instincts are ordering you to grab a parachute and jump out of the window (squashing women and children along the way). If you think you're an exception, answer this question: How brave do you feel about BP today?

7. Catching a falling share isn't easy.
I had three grabs at Aviva before I finally got my timing right. I bought at 383p on 26 February, 341p on 12 May, and 314p on 20 May. I took an immediate hit on my first two attempts, but the third paid off. And today, with the shares trading at 337p, I'm close to breaking even. Plus I should enjoy a fat yield. So I finally made the right call. I wish I could say the same about my bargain hunting forays into BP, Barclays, and Lloyds.

8. Investment funds have their good points.
Too many investment funds destroy your wealth with high charges and low returns, but the very best do exactly the reverse, and give you diversification to boot. My trio of favourite investment trusts -- Baring Emerging Europe, BlackRock Latin American, and Scottish Oriental Small Companies -- may have dipped lately, but they have avoided the wholesale devastation experienced by some of my individual equity holdings.

9. If it all gets too painful, look away.
I still check my portfolio almost every day, and more than once. I tell myself it's for professional reasons, although, of course, it's personal as well. But when things get too ugly, I simply refuse to look. It saves a lot of fuss and bother, and also stops you from doing something daft, like off-loading a good stock in a flurry of panic.

10. Buy and hold wins the day.
Too much fussing and fretting over an investment portfolio isn't good for you. Trying to time the market is positively bad for you. Stop-losses are a double-edged sword. Spread betting is for crazies. Your crystal ball is broken. Nobody knows what is going to happen next. Only one tactic can see you through: buy and hold. Time is on your side. Markets will revive. Until they do, keep dreaming of dividends.

Kris Eddy prepared this article for publication on Fool.com. It was originally written by Harvey Jones, who owns every company and investment trust he mentions in this article. Kris does not own shares of any companies mentioned. The Motley Fool has a disclosure policy.


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