Investors tend to overreact in corrections.
They sell at the wrong time. They take their money out of the markets.
But if you follow these three very simple rules, you’ll be fine.
Tip No. 1 — Don’t panic
If you panic, you sell. And if you sell, you miss the potential for the recovery rally. We have to remember that economists are still bullish on U.S. economic growth going forward.
Tip No. 2 – Consider buying the dip
Wait to see where the market begins to show signs of catching support and recovering. Also, be sure to wait for signs of a higher move to avoid buying into head fakes.
With small cap stocks, one of the best ways to trade dips is by diversifying with small-cap ETFs.
As many of us are aware, ETFs offer us more for less. For example, iShares Russell 2000 ETF (IWM) costs $142 a share at the moment and it offers access to 2,000 small-cap domestic stocks, with trades such as Etsy Inc., Ciena Corporation, Cree Inc., and Five Below Inc.
You could even buy the iShares Russell 2000 Growth ETF (IWO) at $179.
They all offer you the opportunity for diversification at less cost than buying a group of stocks.
Tip No. 3 – Do nothing and wait for the storm to blow over
It may take some time for investors and traders to feel confident in buying again. If you’re most comfortable waiting for the possibility of a resumed rally, do so. It’s your money. Take your time. But remember, markets are resilient and can snap back quickly, too.
Tip No. 4 – Use Fear as an Opportunity
Sir John Templeton advises that you buy “excessive pessimism.”
Warren Buffett advises that a “climate of fear is your friend when investing; a euphoric world is your enemy.” And of course, we all remember his advice to “be fearful when others are greedy and greedy when others are fearful.”
One of the greatest examples was his stake in shares of The Washington Post. Shares may have plummeted in the bear market of 1973-74, but the billionaire still saw value, buying and watching his take explode more than 100 times over.
Investing legend Baron Rothschild once told investors, “The time to buy is when there’s blood in the streets, even if the blood is your own.”
In short, the last thing you want to do in a pullback is panic. Simply wait it out, and remain calm. Investing accordingly, and calmly.