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Is Your Portfolio Prepared for a Potential 2018 Market Correction?

I’m sure you’ve heard this famous quote by the brilliant billionaire investor Warren Buffett, but I’m going to quote him again anyway, since I believe many investors completely forget about it, especially in times like these when the U.S. markets are experiencing a melt-up: “…be fearful when others are greedy, be greedy when others are fearful.” But this is far easier said than done, especially with all the euphoric buzz in the financial media these days.

Ray Dalio, a brilliant billionaire investor, thinks that investors who are holding cash will “feel stupid,” but contrary to the popular belief of many bulls, I think there’s zero shame in holding cash and defensive positions, so your portfolio is prepared once the tide turns. As we all know, there’s no bell that goes off when the markets reach a peak and begin to fall down to Earth.

With U.S. markets hitting an inflection point and surging higher, many investors should be skeptical; however, the general public is likely bullish, as they continue to dump money into the markets for the fear of missing out. Goldman Sachs Group Inc. recently warned that there’s a “high probability” of a stock market correction in 2018, which may result in a 10-20% pullback, as equities fall back to more reasonable valuations.

How vulnerable are the Canadian markets?

Given that the TSX index hasn’t been roaring as loudly as its U.S. counterparts, I believe many Canadian securities will be subject to a less severe correction, especially undervalued firms that have continued to be underappreciated by the markets. That said, many Canadian stocks still stand to be crushed, as NAFTA fears would exacerbate any correction that’d affect the global markets.

Are you prepared for such a correction?

I’ve encouraged investors to buy cheap defensive Canadian dividend stocks while they continue to sell off. Everybody on the Street is greedy, and that should be a sign that it’s time to take a step back and consider the longer-term picture to ensure you’re ready for any scenario — whether the markets are in a melt-up or a melt-down.

Canadian Utilities Limited (TSX:CU) and Fortis Inc. (TSX:FTS)(NYSE:FTS) are two wonderful defensive utilities that keep getting cheaper by the day. Once the tides turn and investors run for the exits, it’ll be these stocks that investors will wish they’d held. Canadian Utilities and Fortis now have juicy 4.4% and 4% dividend yields, respectively, which are very attractive given the stability they’ll add to any portfolio.

Bottom line

It’s all right to be bullish, but if you’re one of the few folks who’ve gotten overly euphoric and dumped your defensive positions in favour of more cyclical ones, it may be time to get back into your defensive positions before the price of admission goes up.

Don’t time the markets. Just be ready for whatever Mr. Market throws at you. He seldom makes logical sense after all because in the short term, the market is a voting machine. In the long term, it’s a weighing machine. Both Canadian Utilities and Fortis are premium names that are trading at undervalued multiples.

Stay hungry. Stay Foolish.

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Fool contributor Joey Frenette has no position in any of the stocks mentioned.

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