The stock market has performed very well for the last five years or so. In fact, since bottoming out in 2009, the Dow Jones is up by 162%, and the S&P 500 has gained 192% without any major market corrections along the way.
After a market performance like this, it's only natural to worry about the possibility of a correction coming. However, with some smart planning, you'll be able to not only survive, but thrive no matter what the market does.
Focus on the right stocks
If you don't want to get crushed during a correction or crash, you need to focus on the right kind of stocks. When you're worried about a correction coming, it's a good time to shift your attention away from momentum stocks and other high risk/high reward stocks. Instead, solid dividend-paying growth stocks tend to perform well during bad times.
A great place to start is with the "dividend aristocrats," which are a group of stocks that have increased their dividends for at least 25 consecutive years. Not only are these some of the most rock-solid companies in the market that can withstand virtually any economic storm, but they also tend to deliver excellent, market-beating performances over the long run.
Some great examples of these are Johnson & Johnson (NYSE:JNJ), Wal-Mart (NYSE:WMT), and Colgate-Palmolive (NYSE:CL). All three offer products or services that are somewhat recession-proof. In fact, Wal-Mart even benefits when the economy tanks, as people abandon luxury retailers and tend to stick to the basics. Just look at how these three companies held up during the 2008-2009 market crash as compared to the S&P 500.
And, their long-term performance is rather impressive, even for stocks many investors consider to be "boring." Over the past 20 years, Johnson & Johnson has averaged a 13.3% annual total return, while Colgate-Palmolive averaged 13.7%, and Wal-Mart averaged 12.6%. All three handily beat the S&P's average total return of 9.4%.
Keep some cash available
If 100% of your portfolio is invested right now, it may be a good time to start building up some cash reserves. After all, one way to look at a correction is a massive drop in the stock market. Or, the "glass half full" way to look at it is stocks going on sale.
With some cash on the sidelines, you'll be able to take advantage of buying opportunities that come up during a correction without having to sell your current holdings at low prices.
During the 2008-2009 crash, there were a lot of investors who would have bought more stocks if they had the money. Next time the market corrects, don't let this happen to you. If one of your favorite companies drops by 20% simply because the market isn't doing well, you'll want to be able to load up on shares at a discount.
So, instead of looking at a correction or a crash as a purely negative event, you should think of it as an opportunity to buy more and set yourself up for the future at a discounted price. Looking back, we all wish we would have bought more tech stocks at the bottom in 2002, right?
Next time a correction comes (and it's a "when" rather than an "if"), don't let it be another "I wish" experience that you talk about for the rest of your life. Instead, use the discounts the correction produces to your advantage and buy when everyone else is selling. As long as you buy the right kind of stocks, you'll be very glad you did.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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