The full effects of the COVID-19 pandemic on the stock market may not be known for many years to come. While some industries and stocks have plummeted, others have come to the fore as our lives, spending habits and needs have changed along with these changing times.

As uncertainty continues to reign, recent rumours of an impending stock market correction have put many traders on tenterhooks. 

But what does this mean, and what might it mean for your portfolio? Let’s take a look.  

What is a stock market correction?

A correction is defined as a 10% decline in the price of a security from its most recent peak. A correction could happen to an individual stock or bond or to entire indexes.

Market corrections are not uncommon and can result in periods of long-term economic downturns (bear markets) as well as recovery and strength (bull markets).

For example, December 2018 saw the Dow Jones and S&P500 tumble dramatically, with the NASDAQ also suffering. While that Christmas was a miserable time for many traders, a subsequent recovery saw swathes of losses recovered by January 2019.

What are the signs of a correction?

Periods of high volatility are often signs of an impending correction, and the recent Gamestop controversy has led to a frenzy of activity across markets.

Recent surges in value for commodities such as Bitcoin (often seen as the biggest gamble an investor can take) and companies and industries involved in future tech has led to concerns that many stocks may be overvalued a month into 2021.

Tracking stock news is important, but upcoming events can also show signs of upcoming markets. The US election had a strong impact on many stocks, for example, as the changing priorities from a Trump to Biden administration begin to be felt.

Using tools such as an economic calendar to track upcoming events can help you get ahead of the game and plan for any upcoming market turbulence.

Should investors play the long game?

History suggests that markets generally recover after corrections, so an upcoming plunge should not necessarily be seen as a reason to dump a significant chunk of your portfolio.

Take the December 2018 example previously mentioned.

While all markets were pretty much at an 18-month low at the worst point of that plummet, masses of stock dumping was followed by a sharp plateauing and eventual recovery.

Looking at world events, with COVID-19 vaccine programmes starting to roll out in several countries, it seems unlikely that any upcoming correction will see long-term investors losing out significantly.

What to do before a stock market crash

However, that is not to say that investors should not be prepared to ride out any choppy waters that do come with a significant downturn.

Here are some ways to safeguard your portfolio against a correction:

• Get your assets in check. If you have any money that you might want to get your hands on soon tied up in stocks, get it out now.
• Avoid panic selling. That’s not to say you should go on a dumping spree, however. If you’ve carefully considered the long-term prospects of your stocks, it’s likely that their performance will stay true in the long-term, regardless of any brief damage.

Stay alert to opportunities. It’s not just all about selling or retaining in times like these. Others’ rushing to get rid of stocks could see some companies start to be seriously undervalued. If a stock you’ve had your eye on starts to nosedive, it might be time to get involved.