Mix one part overbought market with two parts rotten Irish debt and you get sell-off. Since late August, the Dow Jones Index has rallied 15% without so much as a 2% dip. Even bulls like us have to admit that the market was due for a pause. Whether or not the recent drop turns into a full blown correction, you can use it to your advantage. And here’s how.
Since 1950, we have had over 30 corrections, drops of 10% or more, and I would guess that we have had at least 100 drops of 5% over the same time period. In our minds a correction is no different than a sale and when stocks go on sale, you should go shopping. A correction gives you the perfect opportunity to buy a stock you always wanted but thought was too expensive. Use your cash on the sidelines or that fixed income investment coming due soon to snap up a bargain. Corrections are also a great time to do a trade-in. Some defensive holdings never go on sale, and if you have a few of those in your portfolio you can use some of the profits to buy beaten up stocks.
