With the effects of the Coronavirus being felt worldwide and the unfolding drama of a US election this year, expect more volatile markets

Key Points:

• There have been 26 market corrections (not including Thursday ) since World War II with an average decline of 13.7%.
• Recoveries have taken four months on average.
• The most recent corrections occurred from September 2018 to December 2018. The S&P 500 bounced into and out of correction territory throughout the autumn of 2018.
• This has been the fastest 10% decline from an all-time high in history.

Stock market corrections are scary but normal. In fact, they’re a sign of a healthy market in most cases. A stock market correction is usually defined as a drop in stock prices of 10 percent or greater from their most recent peak. If prices drop by 20 percent or more, it is then called a bear market.

What to do during a market correction

First, resist the urge to “time the market.” Although it’s possible to make some short-term money trading the ups and downs of the market, it’s very difficult for the average investor to build long-term wealth by timing the market.

Most people lose money by trying to move their money around to participate in the ups and avoid the downs. Data show that not only do most people lack the discipline to stick to a winning investing strategy in correcting markets, but they also tend to transact at the wrong times causing even larger losses.

When we build a portfolio, we expect that one out of every 4 calendar quarters will have a negative return. We control the magnitude of the negative returns by selecting a mix of investments that have either more potential for upside less potential for high returns and also less risk—called diversification.

If you’re going to invest in the market, it is best to understand that stock market corrections are going to occur, and it’s often best to just ride them out. Resist the urge to trade and profit from them. Follow the old Wall Street cliche—never catch a falling knife.

How to lessen the impact of short-term market volatility on your portfolio

1. Communicate: Start talking to your advisor. Communication is very important during market corrections.
2. Get a Portfolio Review: What types of investments are you holding. Are they in-line with your risk tolerance? We’ve been in the longest bull market in history and it’s likely your portfolio is in need of rebalancing.
3. Timeline: What stage are you in with your retirement horizon? Are you 40 or 60? If your young market corrections are excellent opportunities to take advantage of lower market valuations.
4. Near Retirement: If your near retirement, the most detrimental aspect of investing is negative returns within 5 years of retirement and 5 years into retirement. Reevaluate your risk tolerance especially if the only assets you have to provide retirement income is your investment account.
5. Cash: Consider having enough cash in the bank to fund your annual expenses. Making withdrawals during negative returns amplifies the effect negative returns on your portfolio.

Market Correction Infographic

Looking for more information on Market Corrections? Here’s a great infographic that dives deep on market corrections. Click here.

Let me know your thoughts below.

Diversification and financial management are key strategies

The recession of 2008-09 may have occurred nearly a decade ago, but it’s still a painful memory for many entrepreneurs. More recently, the decline in oil prices has caused a slowdown in producing regions that have hurt business owners.

Unfortunately, economic downturns are a fact of life when you’re running a business. But there are steps you can take now to prepare your business to weather a storm and emerge even stronger.

Entrepreneurs often know they should be prepared for tough times, but they don’t always take the necessary steps.

Here are five ways you can recession-proof your company.

1. Grow your customer base

It’s hard to overemphasize the importance of increasing the number of customers you have. According to a recent study, nearly one in six well-established businesses had encountered financial difficulty because of losing a single client. Very often, businesses are not prepared to deal with the unexpected loss of their biggest client or contract.

2. Focus on your finances

Solid financial management is vital for ensuring your company is ready to weather an economic downturn. Entrepreneurs need to have early warning systems to let them know when trouble is brewing. The numbers tell you the truth about your business and you need to embrace them.

Consider setting up a cash flow planner. To do so, use a spreadsheet to record projected revenues and expenses for the next 13 weeks and then update it each week. This allows you to get a handle on when payments from customers are expected versus when suppliers must be paid. You can then plan for periods of tight cash flow, coming projects and financing needs.

Consider setting up a financial dashboard, showing four or five key performance indicators on the financial health of your business.

3. Offer new products and services

It’s easy for business owners to get comfortable with the products or services that have been successful for them in the past. However, broadening your line-up may be the key to surviving during the next recession.

In fact, you may not even have to come up with something completely new. Instead, you might be able to repurpose your products for another market. For example, manufactured products used in the oil and gas sector could be effective in other areas with just a few changes. Research showed that having a range of products and service lines can be an important form of diversification.

4. Expand internationally

International expansion is another great way to diversify your business. If your sales dip in Canada, you may be able to make up the shortfall in markets with stronger growth.

Exporting opens up a lot of opportunities. Canada has cultural and economic ties with the U.S. and Western Europe, and our small and mid-sized businesses can often be very successful there. Those markets, in turn, can be a launching pad to higher-growth emerging markets.

5. Stress-test your business

As the last recession proved, some circumstances simply can’t be foreseen.

That’s why it’s important to run through various scenarios now, including how you’d handle a sharp drop in sales. While you’re at it, look at different crisis and disaster scenarios and put contingency plans in place to deal with them.

Look at things like: What happens if our input prices rise because of the weaker dollar. What if key people in your business were all of a sudden unable to come to work because of illness or a natural disaster? Unexpected developments can derail businesses.

Lessons learned

• Innovation counts—Successful businesses offer new products and services often and quickly adopt new technology.
• Get help—Networking, hiring consultants and setting up an advisory board are ways successful businesses get external advice.
• Map it out—Developing a strategic plan with specific targets will help to keep your business on track even as economic conditions change.
• Master financial management—Keeping tabs on your finances allows you to plan better, see trouble brewing and react quickly.

Why should I bother with an advisory board?

There’s increasing recognition that effective advisory boards provide excellent support to business owners for a minimal cost. Instead of asking why you should have a board, you should be focused on the best ways to establish one and how to find qualified advisors.

Effective boards can bring huge benefits to small and medium-sized businesses, but for that to happen, you need the right people.

Staffing your board

Advisory boards exist primarily to add value to the business. This means ideally, they should be staffed to complement the abilities of the entrepreneur who runs it.

Before seeking out potential candidates, you should do a quick SWOT analysis to understand your company’s strengths and weaknesses, as well as the opportunities and threats it faces. That makes it easier for companies to identify areas in which complementary skillsets are needed.

Trust is also a key factor. To provide valuable input, advisory board members need to know as much as possible about what is going on in the business.

The more an entrepreneur trusts his advisory board members, the more open he is likely to be with them. They will be in a far better position to provide constructive advice.

The ability of a potential board member to diplomatically challenge an entrepreneur’s ideas and to help the company navigate through periods of growth and change is also highly prized.

What’s in it for the advisors?

While listing the ideal qualities entrepreneurs want in advisory board members is a good start, attracting qualified candidates is much harder. One major problem: Entrepreneurs don’t generally have the budget to pay the fees that larger companies do.

As a result, companies are best off trying to recruit candidates who are not in it for the money, but rather have a genuine desire to see the owner do well.

Potential advisory board candidates can often be found among the owner’s personal contacts. You probably know the sort of high-calibre business executives, university professors or professionals who would make ideal advisory board members.

And don’t forget the growing numbers of retired business executives. Many remain active and interested in business and are itching to make a contribution by attending advisory board meetings and offering their experience, wisdom, and advice.

Formal boards of directors may be required

The stakes rise considerably when businesses shift from using advisory boards to statutory boards of directors.

This usually occurs when businesses either transform into public companies or when they take on investors—such as venture capital funds or private equity firms—who want board representation to represent their interests.

Members of statutory boards will generally have slightly different profiles than advisory board members. You will generally favour someone with “C”-level management experience. That means a Chief Executive Officer, Chief Information Officer, Chief Financial Officer or someone with equivalent experience.

Recruitment can be difficult

In addition, not all skill sets are easily recruited.

Because of the influence that complex Sarbanes-Oxley corporate governance legislation guidelines have had on reporting standards, audit committee members are increasingly in demand.

Entrepreneurs faced with more stringent requirements for director qualifications and the potential for liability will need to follow a formal recruitment process and offer higher compensation.