Market Corrections: Buy, Sell Or Ignore?

Lately it seems like the stock market is more volatile than ever.  Whether it’s a crisis in the Middle East, a Chinese asset bubble about to burst, a natural disaster or an environmental catastrophe, the stock market sits on pins and needles waiting for the next event to send it into a tailspin.

After the stock markets crashed in 2008, the Spring of 2009 provided us with one of the best buying opportunities of our life time.  While that particular market crash lasted over 6 months and perhaps offered a more obvious time for investors to buy (with bank dividend yields approaching double-digits), other world events have been producing smaller stock market corrections that offer potential bargains for the opportunistic investor.

Time To Buy

Major world events often lead to panic in the stock markets, with a “sky-is-falling” type of fear that produces short term sell-off’s.  Opportunistic investors have often been rewarded by purchasing out-of-favour stocks.  Buyers who enjoy these market corrections will typically hold a cash reserve or a margin account to take advantage of potential bargains.

An example of a stock specific world event leading to a buying opportunity was the British Petroleum oil disaster in the Gulf Coast last year.  BP stock reached a 52 week high of $60.98 on April 15th, 2010.  On April 20th, an explosion at the Deepwater Horizon drilling rig caused a massive oil spill that lasted for months.  BP obviously took a lot of heat over the incident and their stock was beaten up, falling to a low of $26.75 on June 28th.  BP stock has recovered by about 70% since the late June lows.

Time To Sell

In some cases an event can lead to a justified decision to sell.  Something may change in the fundamentals of a business you own, or you may not feel comfortable owning a certain asset class any longer.  Selling in a panic is not a smart strategy, but if the investment no longer fits with your overall plan it might be a good idea to sell and move on.

When Manulife Financial slashed their dividend in half back in August 2009, dividend investors were shocked to say the least.  A staple in many dividend growth investing portfolios prior to the recession, MFC was now a fire-sale in the stock market.

Time To Ignore

With stock specific market corrections investors have an opportunity to evaluate the individual situation and decide to buy, sell or ignore.  This proves more difficult with a broad based market correction, where many economic factors are in play.

The recent events in the Middle East and in Japan have led to a small panic in the markets, but for an investor with a long term view this volatility will only be seen as a tiny blip on the radar.  Ignoring these types of market corrections is likely the best approach because trying to time the market rarely works out in your favour.

Often the best strategy in most situations is to simply wait.  It works for preventing impulse shopping and it will work to prevent you from making a hasty decision without learning all of the facts.  Stick with your plan and don’t let the media noise and market volatility trick you into making a mistake.

Back in December I took advantage of a temporary sell-off and purchased some BMO shares after they fell 7% following a large acquisition.  But I had some cash reserves and was already hunting for a stock to add to my portfolio.

How do you approach market corrections to individual stocks or to the market in general?