Have You Begun to Prepare for the Next Correction?

Have You Begun to Prepare for the Next Correction?

This past week, the Dow Jones Industrial Average set new intraday and closing records a few different times. A number of its components are trading near their all-time highs, as individual stocks and the major indexes just keep climbing.

But while investors' net worth continues to increase, it's hard not to think about the possibility of a correction -- which I think is pretty much inevitable. Historically, the markets have fallen 5% three times over a 12-month period, 10% once a year, and 20% or more every three and a half years. A 5% correction to the downside is therefore never more than four months away.

A correction isn't something to fear. Think of it less as a decline in your net worth and more like a good sale at your favorite store. When you can embrace looking at corrections this way, you've taken the most important step toward preparing yourself for market downturns.

While a 5% correction may not be what investors would consider a good buying opportunity, the once-a-year 10% correction or even the 20% or more decline should create a few attractive candidates. And that's what you need to be ready for.

How to prepare yourself? Start saving money, so that once a correction starts serving up buy opportunities, you can take advantage without having to sell your existing positions. A correction isn't a good time to sell.

But don't use up that cash in the meantime. In a market where everything keeps rising, like the one we're seeing now, the thought that you can't possibly pick a loser begins to creep in -- and before you know it, all your cash is gone before the correction ever begins.

Allowing yourself some time to mentally and financially prepare for a correction can not only save you a lot of heart ache and anxiety, but it could save you thousands of dollars as you buy shares when they go on sale. You can't place a dollar amount on minimizing your investing stress, but you'll certainly see the dollars flowing into your investment account if you prepare and stick to a market correction plan.

A deeper Foolish perspective
Millions of Americans have waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest and put their money at further risk. Yet those who've stayed out of the market have missed out on huge gains and put their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important and what you need to do to get started. Whether your a seasoned vet or just a beginner there is something in there for everyone. Click here to get your copy today -- it's absolutely free.

The article Have You Begun to Prepare for the Next Correction? originally appeared on Fool.com.

Fool contributor Matt Thalman has no position in any stocks mentioned. Check back Monday through Friday as Matt explains what caused the big winners and losers of the day, and every Saturday for a weekly recap. Follow Matt on Twitter @mthalman5513. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Originally published