Reduce Your Portfolio's Downside Risk Before The Coming Market Correction

Mar. 31, 2014 5:01 AM ETAFL, AZN, BAX, LUMN, JNJ, LEG, LNT, PG, TLT, WM, DRI
Bob Johnson profile picture
Bob Johnson


  • US stock markets are now at the end of a 5-year bull run.
  • Consensus is that a correction is due, or already may be underway.
  • Now is the time to evaluate your portfolio for weaknesses in balance and holdings.
  • A guide is presented to evaluate the downside risks of individual stocks in a correction.

I'm sure I do not have to tell you that the stock market has been in an upward trend now for five years. As much as there has ever been in my lifetime, this has been a bull market. The Dow Jones Industrial average rose from 8,000 to over 16,000 in the period for a 102% gain. We certainly hope it will keep rising. However, the odds are we are either due for or in the beginning of a correction.

The Market Will Act Like the Market

There is a growing consensus that we are well overdue for a correction of 10% to 15% or 20%. This is not empty speculation, but is based on historical patterns as well as changes that are going on now in the economy and the market.

We know that the economy and the market have been artificially stimulated and that the market has responded in lockstep with the release of money from the Fed. As we all know, that is going to stop. One would be naive to believe that the economy and corporate earnings are strong enough to continue the upward trend in the market. The TTM P/E ratio is at about 19, not nosebleed territory, but well above the norm. A more normal P/E of 16 would put the market at 13,400, a 17.5% decline from its present level. I quote The Reformed Broker,

"Since the end of World War II (1945), there have been 27 corrections of 10% or more, versus only 12 full-blown bear markets (with losses of 20% +). The average decline during these 27 episodes has been 13.3% and they've taken an average of 71 days to play out (just over three months). The most recent correction took place in 2011, between the end of April into the end of September. The Dow dropped roughly 16%. The S&P 500 actually dropped

This article was written by

Bob Johnson profile picture
Welcome to my author's site. I hope you find my articles interesting and informative. A man-with-a-plan, I am utilizing knowledge gained from my business degree 25+ years in the business world and a similar number of years of investing experience, to manage my investments. I have created and maintain a stable and growing portfolio of individual US listed dividend growth stocks, over 30% of which are non-US based but headquartered in Canada, Great Briton, the Netherlands and Australia. I believe that asset allocation is the primary decision an investor must make considering his objectives, time frame and risk tolerance. I am fully invested and 90% of that is in stock. I believe that the small individual investor is often best served by low cost index funds. Stock picking, attempted market timing and frequent trading usually work to the disadvantage of the average small investor. However, you may define small as you like and nothing prevents any investor from emulating the market greats of our time such as Warren Buffett or Peter Lynch. Greater rewards can be obtained by buying and holding individual securities if one has background, the interest, the time and the disciplne to do so in an effective way. There are many ways to make money in the stock and bond markets. My approach to is to take ownership positions in successful large cap companies and hold them a number of years. Dividend Growth Investing is a conservative approach which involves lower than average risks and higher than average rewards. My writing experience began when I was a senior in high school. I was a local stringer for Maine's largest newspaper and covered school and amatuer sports. Concurrent with a successful career in the business world I wrote magazine articles, journal articles, short fiction, poetry and a devotional book. A long time student of security markets I immensely enjoy the opportunity to write for Seeking Alpha, which is a very high quality well run organization with excellent editorial support. It is also possibly the best business forum on the internet and I am proud to be a part of it. Most of my articles focus on several topics: Income Portfolio Strategy Mining Canadian Banks and Telecoms Best regards and good luck! -- Bob J

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