Do's and Don'ts of Market Corrections

Anybody can be a good investor in an up market.  It's the corrections that weed out the amateurs.

If you want to get rich with stocks, here's what you're not allowed to do:

1.  Sell everything because you are absolutely positive the market's going lower.  Even if you're right, even if the market drops another 5 or 10% before it turns around and goes back up - you will screw it up.  Because you will not buy back in.  You will be all puffed up from having been right about the decline and that smug pessimism will turn into your pride and joy, your guiding star.  You will keep sitting there with your cash in a money market fund paying a tenth of one percent and you won't believe any bounce up is real.  You'll miss the whole damn thing.  I've seen it a million, gazillion times.

If you want to get rich with stocks, here's what you have to do:

1.  Catch your breath.

2.  Wait for the market to stop collapsing.

3.  Look at your account with a steady hand.  

4.  If you have losses in a taxable account (not your retirement accounts), this is where you should be ruthless.  Lock in losses and bank your tax-losses against any future realized gains.  If you like the stock you just sold, immediately repurchase it in another account (in your spouse's name, in a retirement account).  Do not wait.  When the market starts to recover, you want to be an owner and participate.  This is just a strategy to get some use out of your short-term (normally unrealized) losses so that you are making maximum use of market volatility.  

5.  If you have cash, add to best quality favorites.  

6.  If you have stocks you really don't like, once again, be ruthless.  Don't worry about "getting back your investment" or "waiting until you break even."  That's yesterday's news.  Go ahead and re-position the money into your favorites. But if you sell something, don't try to get too smart and time the turn around.  Buy now.