It was just a week ago that we were cheering the market higher.
The S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) was sitting above 5,600 points and had just set itself a new six-year high.
Commonwealth Bank of Australia (ASX: CBA) shares were also on their way up and looked like they'd break through the $84 level for the first time in history. Even BHP Billiton Limited (ASX: BHP) looked like breaking through $40 – a feat it has not achieved since 2011.
With all things going right, it seemed like the next stop for the Aussie market was the 6,000 level.
Oh how things have changed since then…
The Dow Jones Industrial Average has dropped to its lowest level since April. Geopolitical tensions are rising in Europe and on the Gaza strip. Concerns are even amassing over the improving US economy, sparking uncertainty over the future of the Federal Reserve's easy-money policies.
Closer to home, all eyes have turned towards Australia's growing unemployment rate which has jumped to more than a 10-year high.
The result has been absolute carnage over the last week. Having plummeted 80 points today alone, the benchmark index has retreated a total of 215 points or 3.8% since the beginning of August.
It'll only be another 6.2%, before this market is officially in a state of correction.
Here's what NOT to do…
Investors often tremble at the very mention of the word 'correction'. They almost jump out of their skin when they hear it could be something even worse, like a market crash!
As we've seen over the last week, investors run in fear, taking their profits off the table to remain on the sidelines until things cool down.
Here are just a few reasons why that is a terrible idea…
1) If you've made a gain on the shares, selling activates a tax liability.
2) Selling shares also increases your brokerage costs. If you were to then buy back in when conditions improved, you'll be paying for brokerage twice.
3) While you're selling at a loss, someone else on the other side of the country is smiling at the opportunity to buy at a significant discount.
4) This might not be a correction – the market could rise 100 or even 200 points tomorrow for all we know. If you sell now, you could miss out on those gains.
Remember this…
Corrections, and even crashes, are a normal part of the market. They're unavoidable.
As painful as they are to endure, it is important to remember that the market should rise over the long term, regardless of what it does today, tomorrow or next month. That much is guaranteed.
Instead of stewing on the market's movements in the near-term, focus on your long-term buy and hold goals. And the reality is, if you can't accept these rough patches, then the stock market probably isn't for you…
Here's what I'm doing…
As much as I've enjoyed watching my portfolio rise in value over the last couple of years, I know that a correction is inevitable.
Of course, I won't enjoy watching my gains trickle down the drain when the time comes, but I am excited for what happens next…
That's because I've been waiting for an opportunity to buy high-quality shares at discounted prices.
Quite a few of them have dropped in price over the last week and are already looking even more appealing. Some of these companies include XERO FPO NZ (ASX: XRO) and Greencross Limited (ASX: GXL) (more here).
I'm also strongly considering increasing my stake in Nearmap Ltd (ASX: NEA) and Veda Group Ltd (ASX: VED) (more here), both of which I have bought recently. While both companies are trading on high P/E multiples, I believe they both boast outstanding long-term potential.
