3 Tips to Prepare for a Market Correction in 2021

You can take advantage of market corrections to help you drive amazing long-term returns. Here’s how you can prepare for a bear market for 2021 or beyond.

| More on:
stock market

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

Market corrections (in which stocks fall more than 10% from a recent high) are more common than you think and one could very well occur in the latter half of 2021. However, there’s nothing for investors to fear about market downturns. Instead, investors should embrace these market corrections, especially if they turn into bear markets (in which stocks fall 20% or more).

Buying quality stocks on dips during market corrections or bear markets is a driver for outstanding long-term returns.

Here are three tips that can help you prepare for a market correction.

Have cash and a stock buy list ready 

Always have cash available. It would be excellent if you’re working and can use a portion of your income to invest every month or every few months.

You need cash that’s ready to be deployed in stocks during market corrections. So, periodically update your list of potential stocks to buy. They should be wonderful businesses that you would be comfortable buying, even when their stocks fall 30-50%.

Notably, during bear markets, the strongest stocks, like Shopify and Amazon could experience smaller corrections (and rebound and rally sooner) than the market. Alternatively, they could trade in a sideways channel. Consider allocating a portion of your available cash in this type of high-resilient stock, despite other stocks falling more and that appear to be bigger bargains.

On your buy list, you’ll also want to have proven dividend stocks.

Buy and hold dividend stocks

Buying and holding a diversified basket of dividend stocks can help you generate extra cash for investment during market corrections. In uncertain economic times, the passive income provided by dividend stocks can provide an extra layer of financial safety for investors.

I’m not talking about holding just any kind of dividend stock. For example, gold, energy, or mining stocks, which pay dividends but are known to have volatile earnings or cash flow, are not good candidates for dividend income.

Brookfield Infrastructure Partners (TSX:BIP.UN)(NYSE:BIP) is one of my largest dividend stock holdings, because I trust it will increase its cash distribution for years to come. Its management has a strong track record of execution that has made BIP into a top-performing utility.

Through thick and thin, including dividend investment, the dividend stock has delivered annualized returns of about 24% since its inception on the TSX in 2009. During this time, it has increased its dividend at a slower pace than its funds from operations, making its dividend growth sustainable over the long run.

Over the years, the global utility has expanded its high-quality portfolio of essential infrastructure assets, including data centres, multi-purpose telecom towers, utilities, midstream, railroads, and toll roads.

BIP is fairly valued right now and provides an initial yield of 3.6%. It’s set to increase its cash distribution by 5-9% in Q1.

For more dividend stock ideas, consider researching Bank of Nova Scotia, H&R REIT, Emera, TELUS, and their peers. Diversify your dividend portfolio. For example, you might limit up to 25% allocation in one sector.

Prepare mentally 

During bear markets, stocks across the board fall substantially. Don’t panic sell. Remember that market corrections are buying opportunities in great businesses.

Prepare mentally by periodically visualizing your stock portfolio falling 30-50%. On corrections of 10% or more, consider at least nibbling shares of some of the great businesses on your buy list. Your long-term returns should be extraordinary by adding on corrections!

The Foolish investor takeaway

No one has a crystal ball to tell when a market correction or bear market will come. We just know that it will eventually! So, prepare for it by having excess cash, keeping your buy list updated, buying and holding quality dividend stocks, and being mentally prepared!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool owns shares of and recommends Amazon and Shopify. The Motley Fool recommends BANK OF NOVA SCOTIA, BROOKFIELD INFRA PARTNERS LP UNITS, Brookfield Infrastructure Partners, EMERA INCORPORATED, and TELUS CORPORATION and recommends the following options: long January 2022 $1,920 calls on Amazon, long January 2023 $1,140 calls on Shopify, short January 2022 $1,940 calls on Amazon, and short January 2023 $1,160 calls on Shopify. Fool contributor Kay Ng owns shares of Amazon, Brookfield Infrastructure, and Shopify.

More on Dividend Stocks

edit Back view of hugging couple standing with real estate agent in front of house for sale
Dividend Stocks

Why Real Estate Stocks Are a No-Brainer Addition to Your Portfolio

Real estate stocks, especially REITs, offer some distinct advantages over other types of stocks, making them must-have additions to most…

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

3 Top TSX Dividend Stocks to Buy for Monthly Passive Income

Top TSX stocks with monthly dividends now trade at cheap prices for investors seeking passive income.

Read more »

Canadian Dollars
Dividend Stocks

Create Free Passive Income and Turn it Into Thousands With 1 TSX Stock

If you can't afford to invest, you can certainly create passive income another way and use that to invest in…

Read more »

Payday ringed on a calendar
Dividend Stocks

Canadian Dividend Investors: 2 ETFs That Pay Monthly Income With High Yields

Dividend ETFs often pay out monthly distributions compared to dividend stocks.

Read more »

think thought consider
Dividend Stocks

2 Stocks I Own and Will Buy More of if They Fall

Stocks tend to go up in the long run. Therefore, buying a basket of diversified stocks on dips should lead…

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

2 Oversold TSX Dividend Stocks to Buy for Passive Income

Blue-chip dividend stocks such as Royal Bank of Canada and Manulife Financial pay investors a tasty forward yield.

Read more »

TFSA and coins
Dividend Stocks

TFSA Passive Income: 3 Solid Stocks to Earn $355 Every Month

Looking to earn steady passive income? Here are three solid TSX stocks that can help you earn a worry-free passive…

Read more »

Technology
Dividend Stocks

RRSP Investors: 2 Stocks to Buy in August for Dividends and Capital Gains

RRSP investors can still find top TSX dividend stocks trading at cheap prices today for a buy-and-hold portfolio.

Read more »