Personal Finance: Embrace correction if you can find it

photo Chris Hopkins

After a full month of declines, the S&P 500 index last week came within a whisker of a so-called correction, defined as a drop of 10 percent from the previous peak. That would be the first such episode since 2012 and the third time since the 19 percent dive during the European debt crisis of 2011. Statistically, these pullbacks tend to be insignificant over a longer time horizon and are necessary to maintain secular momentum in a bull market.

Yet to hear the breathless prattling in the financial media, one might be forgiven for shredding the 401(k) statement unopened. Last Tuesday with the market down just 1.6 percent on the day, the headline on a popular financial website shrieked: "Nightmare on Wall Street: will the bloodbath continue?" Awash in a sea of hyperbole, what is a judicious investor to do?

Tune out the noise and stick to the plan. Serious investors should have a basic game plan in place that defines the appropriate exposure to the stock market, based upon objectives and risk tolerance. Weekly vicissitudes can then be confidently ignored or at least tolerated with a mild antacid.

And if you have cash allocated for stocks, use these brief interludes to buy. Market valuations ebb and flow as Wall Street debates "fair value" and how many analysts can dance on the head of a pin. But for investors with a reasonable time frame, the recent modest pullback is an opportunity to gain more exposure to the increasingly robust American economy.

While the progress since the recession has been frustratingly slow, the United States now has the wind at its back heading into the end of the year and on into 2015. Weakness in the rest of the world has boosted the value of the dollar just in time for the holiday shopping season. And thanks to a dramatic surge in domestic oil and gas production, American drivers are paying less at the pump with more relief yet to come. Merry Christmas.

Meanwhile, job creation is running at a healthy rate and unemployment is below 6 percent. And workers are now less concerned with losing their jobs. Labor Department figures show that layoffs have reached the lowest weekly level since 2000. When adjusted for the size of the workforce, jobless claims are actually lower than at any time since the 1970s. That should leave families more willing to consider major expenditures like homes, cars and appliances.

Corporate profits have continued to grow since the end of the recession, but importantly more cash is being directed into productive capital expenditures that cycle dollars back through the economy. That should serve to reinforce the job growth story and reward shareholders.

Given the recent "correction," some high quality companies are now more attractively priced and should be on the shopping list for serious long-term investors. While it is easy to find Cassandras holding forth on the excessive valuation in the markets, experience shows that these declines tend to be short lived and shallow when the fundamental economic picture is as hearty as it appears today for the U.S.

Trading is a short-term activity that rarely profits the average household. Investing, on the other hand, is a systematic and disciplined process over a long horizon based upon a defined set of objectives and a sturdy asset allocation. It allows one to weather the ups and downs without overreacting to the noise and the hype, while providing the fortitude to put money to work when others are heading for the exits.

Christopher A. Hopkins, CFA, is vice president of Barnett & Co. Investment Advisors in Chattanooga.

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