“What should we do now?”, is the question on everyone’s mind. Our answer to clients is always the same: Make sure that you have an asset allocation strategy that is appropriate for your risk tolerance over the long-term, and then do nothing. Selling good assets once the market is down is the same as taking the flu shot once you’ve gotten the flu.  To prevent yourself from getting the flu again, wait until your healthy and then take action to prevent further flare-ups.  You should follow this same advice when your portfolio gets sick. When your portfolio recovers, then it’s time to take action. And here’s what you should do:

  • Never let one stock be more than 5% of your portfolio and never let one sector/industry be more than 15%.
  • Own companies that have good balance sheets—debt to equity of less than 60% is preferable.
  • Investing in companies that have all their operations in emerging markets is highly risky and should be avoided.
  • Your companies should pay dividends and have a history of raising dividends over time.
  • The majority of your portfolio should be invested in non-cyclical companies; own what people need and use everyday.
  • Don’t overpay for earnings. When you pay above market multiples for earnings you are placing a bet on the future.  Invest in today, not tomorrow.
  • Always own fixed income. When the market goes down, you’ll be glad to have a buffer.

Stock market corrections happen almost every year and it’s a part of investing. No one knows the future, so don’t even try to market time nor should you invest with anyone who claims they can. Stocks will go up and down, but if you’ve done your homework and invested according to the principles laid out above, your portfolio will continue be healthy in the long term.