What I Will Do When The Market Corrects Or Crashes

by: Rocco Pendola

Nothing. It's pretty simple. Actually, I will do something, but it will not be all that much different from what I have been doing all along.

It doesn't make me laugh that we have any number of articles hitting these days warning of pending doom. I have been following the stock market for over 20 years and, even before the days of the 24-hour on and offline news cycle, some people always cry that the sky is falling. It just makes me laugh how observer after observer tries to tell you what you should do in the event of a correction or, worse yet, a crash.

First off, corrections and crashes are normal. They naturally occur throughout the life cycle of all types of markets, particularly the stock market. The cats who get all worked up about possible corrections and crashes probably also preach that the world is crazier today than it was when they were kids. Cue up, Billy Joel ... We didn't start the fire, it was always burning since the world's been turning.

Second, there's really little reason to do much of anything unless one of the following scenarios apply to you:

  • You're close to retirement. You should already be re-balanced in such a way that you've mitigated the types of devastating losses that corrections and crashes can bring. It's sort of like finally getting around to making your will. If you need your cash in short order - or at least some of it - take steps to ensure that you don't get caught in a vulnerable spot when the market dives.
  • You need your money for some other reason. You've been investing in the types of instruments that will crater in a crash or correction, but the time has come where you need to send the kid to college, buy a house or place a futures bet on the Leafs to win the Stanley Cup next season.
  • You're an active trader. You probably have a good chunk of cash committed to relatively short-term situations. A correction or crash will derail your plans. Do whatever it is that you do to always be ready - get defensive, go short, increase cash - it's up to you, but you should always be prepared.

There's another type of person who might want to do something in anticipation of a correction or crash. But, this type of person probably should not be a self-directed investor or, at the very least, should not be sitting in investments that make it difficult to sleep at night. It's quite a conundrum. What's worse? Not being able to sleep at night leading up to retirement because you're anxious about risk OR not being able to sleep at night once you retire because you're anxious about not having enough money?

That's a very personal dilemma that countless people end up facing, often when it's too late to really do anything meaningful about it.

Nevertheless, over the last year, I have done a better job sticking to an investment plan than I ever have before in my life. Being a part of Seeking Alpha certainly helps the process.

When the market corrects or crashes (and it will), ignore the geniuses who told you so. That's like predicting that an earthquake will hit Japan or California, that a tornado will strike the Midwest or that the Leafs will miss the playoffs for, what, the fourth season in a row. Instead do one of two things:

  • Stay the course;
  • Or, if you do not have a course, consider it the perfect time to implement one and stick to it, religiously, week after week or month after month, depending on your personal cash flow situation.

I intend to not only stay, but step up the course.

As subscribers to my options investing newsletter know, I invest on a weekly to bi-weekly basis in a handful of stocks and ETFs I feel like I have a good handle on. These are my long-term investments. I measure long-term in years, not weeks or months.

Right now, I have a basket full of buy-and-hold, dividend-paying stocks that I love. I feel like I know their stories quite well and I plow as much cash as I can into each of them every week or every other week. Unless the story changes in a meaningful way, I do not intend to stop, no matter what the broader market does for, when the dust settles, ends up being a minute.

Several of those stocks are in the media and telecommunications spaces. Right now I am long Time Warner (NYSE:TWX), Rogers Communications (NYSE:RCI) and Verizon (NYSE:VZ), plus I have a small position in Bell Canada (NYSE:BCE). I want to be long Disney (NYSE:DIS), but I felt like I did not move fast enough. And, it's only in the cases of BCE and DIS where I will change course a bit, but it will hardly be defensive. If the market corrects or crashes, I would be delighted to see both stocks get wacked to levels below where I wish I would have bought them in the first place.

So, instead of putting $1 apiece in TWX, RCI and VZ, I will put in $2 or $3 on weakness. And I will add to my small position in BCE with, say, $5, and start a position in DIS with the same amount. I hope you realize that I use these figures to illustrate my plans. They're not actual investment amounts, but the proportion that they increase by are pretty close to actual.

Right now, I have two long-term speculative plays I like: Pandora (NYSE:P) and Wendy's (NASDAQ:WEN). Both stocks have pulled back. I am in the process of adding to my positions in each. On a broader-market pullback, unrelated to specific company events, I will add more.

I intend to continue or commence writing covered calls against each position to enhance income generation.

In addition, on significant broader-market weakness, I will add to or create new positions in stocks I consider market leaders, such as Apple (NASDAQ:AAPL) and Amazon.com (NASDAQ:AMZN). In both cases, I will likely buy ATM or slightly OTM AAPL and AMZN calls, as both have proven, especially throughout 2011, that they lead the market following triple-digit drops in the Dow.

Market weakness, particularly considerable downward moves, provide opportunity. Many of the stocks I follow - ranging from AMZN to P - continue to prove that theory time and time again. When all heck breaks loose on the stock market, do what Springsteen says in the title track of his new record:

Hold tight to your anger, don't fall to your fears

That's the best investing advice I've received in a long time.

Disclosure: I am long AAPL, BCE, P, RCI, TWX, VZ, WEN.

Additional disclosure: I may initiate a long position in AMZN or DIS at anytime.