After hitting a new high just last month, by the end of last week the US Nasdaq index had fallen over 10% in a matter of weeks. That meets the technical definition of a stock market correction.
We are not yet in the territory of a crash, though depending on what happens in coming weeks and months we could get there yet.
What does that mean for an investor like me right now? Ought I to sell some of my portfolio — or hunt for buying opportunities?
Don’t panic Captain Mainwaring!
The first rule in any stock market correction is to stay calm, think, and act rationally.
A correction can be a costly event – or a lucrative opportunity. How it turns out for a particular investor depends in part on how they react.
So in coming weeks I will take as calm and collected approach to investing as I can, regardless of what might be going on in the markets.
How to think about value
I am an investor, not a trader. A market fall can give a trader the collywobbles. But as an investor, a correction can be welcome, even if means the paper value of my portfolio declines. Indeed, it can be a buying opportunity.
The paper value is only that, after all. I do not actually lose money on a share I own when its price falls below what I paid, unless I sell it.
As a long-term investor, I expect prices to move up and down over time. But my approach is all about buying pieces of great companies for less than I believe they are worth.
So even if shares I own have fallen in value, unless the long-term investment case has changed, then a falling share price does not bother me. In fact, it could be a welcome buying opportunity as far as I am concerned.
What I’m looking for right now
Putting that into practice, I am on the lookout for shares that are currently trading well below their long-term value. If a stock market correction makes them even cheaper, all the better!
As an example, consider one share I bought recently as its price continued to fall (it is down a quarter so far this yea. Prudential (LSE: PRU).
The financial services company is long-established and has strong name recognition among consumers in some of its longstanding Asian markets. That has helped it build a large customer base. But Prudential has been trying to grow by expanding its presence in additional high-growth markets across Asia.
Over the coming years and decades, I think that could be a profitable move. From its well-known brand to its deep market understanding, I think Prudential is well-positioned for success.
With its 2.6% yield, if the dividend is maintained then I will earn passive income while I wait for an increase in its share price that I think Prudential merits.
Still, choppy financial markets and weak consumer confidence that have contributed to the Nasdaq market correction ultimately hurts revenues at Prudential too.
As a believer in its long-term investment case though, I am not selling! If I had spare cash to invest I would consider buying more shares.
