The stock market always follows a pattern where every bull market is followed by a bear market. Whenever the stock market gets a little heated up, the stock market undergoes a correction which is normally around 10%. Though there is no standard definition for market correction, a drop of 10% from recent highs is widely considered a correction by market participants. So, it is important for us to understand market corrections and learn how to manage our investments during these periods. 

What Causes Market Correction?

Market correction happens due to many negative factors and when market participants react based on these factors, the market succumbs to selling pressure. Negative sentiments among traders and investors can be due to geopolitical tensions, wars, trade tariffs, etc. 

Whenever there is uncertainty in the global economy or any disruptions in the global supply chain, markets get affected. In addition, if there is any inconsistency at policy level, it would likely lead to negative market sentiments. 

Macroeconomic data like gross domestic product (GDP), inflation, unemployment rate, manufacturing output, etc. may spark a market correction, if they come in worse than expected. These numbers are very important because they can have a significant impact on the collective psychology of market participants. Even if the data doesn’t point to a crisis, if people are worried about rising unemployment or inflation or if consumer confidence falters, they might panic and sell off investments, fearing a slowdown regardless of the actual numbers.

Strong earnings is one of the important factors that boost investors’ sentiments. But if many companies are unable to report better-than-expected results during a quarter or successive quarters, then it would lead to market corrections. 

How Can You Deal With Market Correction?

Markets are inherently uncertain and nobody can predict the start of a market correction. All you can do is hope for the best and prepare for the worst. One of the few things you can do before market correction is prepare yourself mentally with respect to the markets. If you do not make decisions based on your emotions, you will not panic sell when the markets fall. 

It is a good idea not to go all in and sit on some cash. You should always have some cash position, so that you do not have to sell your investments, when your portfolio is in the red, in case of any emergency. 

Another way to be prepared is to diversify your investments. In other words you must  spread your money across different types of assets like stocks, bonds, real estate, gold, silver, etc. This strategy will reduce the risk of losing money and protect your capital.For instance, if the equities market is not doing well, then bonds might be performing well, or vice versa. Having said that, diversification does not guarantee to protect you from losses completely.

Always keep track of your investment and portfolio and stay on course with your investment mix by regularly reviewing and adjusting your portfolio. Over time, market fluctuations can shift the balance of your assets, potentially exposing you to more risk than you intended. By periodically rebalancing your portfolio you can ensure that it is aligned with your goals and risk tolerance.

Leveraging Technical Analysis

Investors can use technical analysis to examine key price levels like support and resistance to anticipate a trend reversal, though there is no assurance. Before a rally or a correction, there is most probably a consolidation in prices. 

A technical correction typically occurs when an asset or the broader market has become overvalued due to continued rise in prices. By analyzing historical price movements through charting, traders and investors can monitor trends. They employ various tools such as bollinger bands, trendlines and other technical indicators to identify potential areas where prices may find support or face resistance.

How To Invest During Market Correction 

As a prudent investor, you should never panic sell during market correction but see market downturns as a chance to buy stocks at lower prices. Another approach can be rupee cost averaging where you invest a fixed amount at regular intervals, regardless of market conditions. You can also incrementally increase the fixed amount every year as your annual salary increases. 

This means you’re buying shares periodically even when the market is falling or rising. By following this habit, you are being consistent with respect to your investments and you can avoid the stress of making impulsive decisions and avoid the mistake of timing the market

When the market corrects, you can look at investing in defensive stocks like consumer staples, FMCG, utilities, etc. These companies sell everyday essentials which people consume even if the economy slows down. These businesses perform steadily even during tough economic situations. If a market correction turns into a broader downturn, these stocks do not see steep corrections comparatively. 

What If You Lose Your Money In Market Correction? 

If you lose your money in a market correction due to panic selling, it might be wise to look at tax-loss harvesting. Tax-loss harvesting is a strategy, where, if you have sold an investment at a lower price compared to your buy price, then you can adjust the losses against your gains from other stock investments. By doing so, you can lower your capital gains tax. 

Conclusion

Market corrections are part and parcel of financial markets and that’s how the market works. As you build your investment portfolio, you should always be aware of it and take the necessary steps to protect your portfolio during corrections. Everyone feels anxious during market corrections but make sure you don’t decide based on your emotions. Plan your portfolio with a focus on diversification and long-term growth mindset.