In correction, most investors ask “Should I sell?” Better question is: “Is my plan failing or is my emotions reacting to volatility that I already signed up for?” Correct response depends on time horizon, cash needs, and whether portfolio drifted away from intended risk level.
When to Hold: The Default Position
For long-term investors, maintaining a position during a market correction is often the most appropriate response. Rather than being a passive choice, holding represents the active execution of a strategy established before the onset of volatility. This approach is generally recommended when specific foundational conditions are met:
- Time horizon for money is long: Typically 5-10+ years minimum. Corrections are temporary noise across decade-plus timeframes. Short-term volatility is irrelevant when not needing money for years.
- Emergency fund and near-term cash needs already covered: Can’t stay invested if might need money soon. But if 6-12 months expenses are in cash, correction doesn’t threaten liquidity.
- Portfolio matches risk capacity: Can stay invested without panic. The allocation was designed assuming corrections would occur. Holding through correction is executing original plan, not making new decision.
- Nothing about life situation changed: Job stability, health, obligations remain similar. If external circumstances haven’t materially shifted, portfolio shouldn’t either.
Holding isn’t doing nothing. Holding means continuing contributions, avoiding reactive trades, and allowing long-term return engine to do its job. Also means accepting portfolio will sometimes look wrong in short run.
When to Rebalance: Rule-Based Response
Rebalancing is not market timing. It’s risk control. Rebalance when market moves changed portfolio’s mix enough that no longer holding what was intended.
Clean rebalancing policy uses bands, for example:
- Rebalance if asset class drifts more than X percentage points from target
- Rebalance if it drifts more than Y% relative to its target weight
Example: If target is 70/30 stocks/bonds and correction pulls stocks down so becoming 62/38, now holding less equity risk than planned. Rebalancing by buying stocks and selling bonds or cash restores plan and forces buying what fell without requiring bravery in moment.
Rebalancing also aligns with psychological truth: people feel like selling during corrections. Rules let doing opposite but in controlled way. Not buying more stocks generally but restoring original allocation that market movements disrupted.
Rebalancing mechanics:
- Calculate current allocation: Determine actual percentages in each asset class
- Compare to targets: Identify how far from intended allocation
- Determine trades needed: Calculate how much to buy and sell to restore targets
- Execute systematically: Place trades using limit orders to control costs
- Document decisions: Record rebalancing date and amounts for tax and review purposes
Rebalancing forces behavior that feels wrong but proves right over time. When stocks fall, they look scary and feel like avoiding. When stocks rise, they look safe and feel like buying more. Rebalancing does opposite: buying what’s scary and selling what’s comfortable.
The discipline produces superior long-term returns by systematically buying low and selling high. Not attempting to time perfect bottom but methodically taking advantage of volatility.
Practical Correction Response Playbook
Simple, practical response sequence that works:
- Pause new decisions for 24-72 hours: Corrections create urgency. Urgency is rarely friend. Time allows emotion to subside and reason to return.
- Check liquidity: Confirm emergency fund and near-term expenses are not in volatile bucket. If they are, might need to sell something regardless of market conditions.
- Check drift: Compare current allocation to target allocation. Calculate percentage in each asset class and compare to plan.
Decide from rules:
- If within bands: Hold and keep contributing normally
- If outside bands: Rebalance to restore target allocation
- If life constraints changed: Revise plan, then implement changes slowly over weeks not days
Limit information intake: More news does not equal more clarity during drawdowns. Constant monitoring increases anxiety without improving decisions. Check portfolio weekly at most during correction.
This playbook works because it removes emotion from process. Not making decisions based on how market feels but based on predetermined criteria. The plan decides, not fear or greed.
The Role of Contributions During Corrections
If still earning income, corrections can be opportunity because contributions buy more shares at lower prices. This is one reason consistent investing tends to beat waiting for bottom. Don’t need to identify perfect day, just need to keep showing up.
If wanting to make this more mechanical, can adopt contribution accelerator rule: increase contributions by small preset amount during drawdowns, as long as it doesn’t compromise emergency savings. It’s disciplined way to act counter-cyclically without pretending to forecast.
Example accelerator: If market down 10%, increase monthly contribution by 10%. If market down 20%, increase by 20%. This systematically adds to stocks when they’re on sale without requiring timing skill or bravery.
Dollar-cost averaging shines during corrections. Regular purchases at declining prices lower average cost basis and increase shares owned. When recovery comes, more shares means larger gains.
The math favors buying during corrections even without timing bottom:
- Month 1: Buy at $100 per share
- Month 2 (correction): Buy at $90 per share
- Month 3 (recovery): Price returns to $100
- Average cost: $95 per share despite ending at same price
- Profit from continuing contributions during decline
This advantage multiplies across longer corrections and larger position sizes. Contributions during volatility are gifts that keep giving through lower cost basis.
Rational Versus Reactive: Self-Assessment
Ask three questions to determine if being rational or reactive:
If market were up 10% instead of down 10%, would I be making this same change?
If no, probably reacting to price movement rather than responding to planning needs. Price alone shouldn’t drive major decisions.
Am I acting on rule written earlier or on feeling created today?
If feeling-driven, probably reactive. If rule-driven, probably rational. The time to make rules is when calm, not when stressed.
Does this action improve odds of sticking with plan for next 5-10 years?
If action makes plan harder to follow long-term, probably mistake. Short-term relief from selling often creates long-term regret.
If can’t answer clearly, default to plan: hold if within risk capacity, rebalance if drifted, reduce risk only if correction exposed true mismatch between plan and reality.
The self-assessment creates brief pause between impulse and action. Often that pause is enough to prevent mistakes. Emotional urges to sell typically fade within days once market stabilizes even slightly. Waiting out urge preserves portfolio and long-term returns.
Corrections test discipline more than investment knowledge. Knowing what to do is easy. Actually doing it during volatility is hard. Rules and self-assessment make hard thing slightly easier by removing constant re-evaluation of basic decisions.
