Correction protection

Q What kind of stocks should I buy to protect myself from a correction?

A The same types of stocks you’d buy with no correction.

Stocks do not move in lockstep, but they do act like a herd, tending to rise and fall together. If a correction sends the Dow Industrials and S&P 500 down 5%, expect most of your common stocks to decline. That’s just how it works.

You protect yourself against corrections in three ways:

Maintaining a long-term allocation that blends equities with lower-risk instruments like bond funds. That allocation should not change just because the stock market rises or falls. In fact, you will appreciate that diversification most when the stock market falls. Bonds are less volatile than stocks, at the cost of lower long-term returns.

Keeping a little cash off the table in your equity portfolio. That allows you to buy when you feel more bullish, but also leaves open the option to sell more shares to boost near-term reserves when you get worried.

Sticking to your plans. Corrections often frighten people, and we understand if a stock decline makes you nervous. But do not let that fear spark bad decisions. Hunker down and wait it out, because no correction lasts forever.