Markets are displaying interesting patterns heading into the final stretch of 2017. For example, the megacaps in the tech sector – the eponymous FANG stocks are in decline. This marks the worst decline in the stocks since the November 2016 presidential election. While whipsaw behaviour in equities markets is nothing new, a slide in the best-performing tech stocks is slightly concerning. Equities analysts across the board are tempering expectations about earnings forecasts for tech stocks.

While somewhat surprising, analysts are not bearish with expectations for other components of the financial markets. By mid-week, the Dow Jones Industrial Average was hovering around 23,434.29 (up 28.60% over 1 year), the S&P 500 index was trading around 2,570.13 (up 19.47% over 1 year), and the NASDAQ composite index was trading at 6,588.53 (up 24.08% over 1 year). All US equities markets are in the black, but concerns of a correction are gradually mounting.

2017 has been a bumper year for equities markets across the spectrum. Tech stocks are on fire, industrials are soaring, and commodity prices are stable. Unfortunately, the gravity effect always comes into play: what goes up must come down. An important economic concept known as ‘reversion to the mean’ continually takes place in financial markets. Since the 2008 global financial crisis, US equities markets have been rising, gradually piling on value for investors. Unfortunately, we are overdue for a correction (10% – 20% downward revision in stock prices). When this comes, it can wipe trillions of dollars off the financial markets. On the plus side, it will also create value-driven investment opportunities.

Investors Know a Correction is Coming

According to a Gallup study conducted by Wells Fargo, over half of investors polled believed that a stock market correction will take place before the end of the year. However, few traders and investors are doing anything to hedge against it. Just 40% of investors have rebalanced their financial portfolios, assigning greater weight allocations to certain stocks, commodities, indices, currency pairs, or contrarian investments. Naturally the most volatile component of a financial portfolio is equities. By reducing holdings in equities, it is possible to protect against a stock market correction. There are opposing views when it comes to rebalancing financial portfolios: on the one hand, some folks believe it is important to offload equities before a correction, while others believe that it is smarter to hold on to equities for the long-term.

Unforeseen Events Can Wipe out Your Equities Portfolio

There is another reason why investors may want to think carefully about an upcoming market correction. If your personal or business finances are in a precarious predicament, you may be at risk of bankruptcy. In a case like this, with an upcoming market correction on the cards, you may want to consider alternatives instead of waiting it out. For example, if you have to file Chapter 13 bankruptcy, your assets will be liquidated to pay off your debts. This includes any stocks that you have in your equities portfolio. Clearly this is not an advisable outcome since it will decimate your investments and result in an unfavourable financial situation. There are several things you can do to guard against bankruptcy-related loss of assets. One is a secure retirement plan known as ERISA. This protects your assets from bankruptcy and you get tax breaks from it.

Another option is transferring your assets into some the else’s name. Perhaps a trust, or a business. Of course, it is preferable to ward off any problems way before they become insurmountable challenges. You may wish to consider various consolidation options as a viable means of protecting your financial portfolio so that the bankruptcy issue doesn’t rear its ugly head. With debt consolidation, you would group together all related debt such as credit card debt (personal or business), and apply for a loan at a lower interest rate to pay off all that debt immediately. This is a preventative measure especially if you can see problems on the horizon.

During the 2008 global financial crisis, the housing market underwent a dramatic correction. Prior to that homeowners were able to apply for home equity loans at inflated valuations as property prices were rising rapidly. If you have debt during periods of rising home prices, home equity loans can help. A home purchased for $350,000 may have been worth $450,000 prior to the bubble bursting. This meant that banks were extending home equity loans to customers across the board.

After the bubble burst, homeowners found themselves upside down financially. They were liable for the home equity loans, but home valuations were significantly depressed. This is why it is important to consider the implications of home equity loans for debt consolidation. At lower interest rates than conventional credit loans, this solution to unforeseen events can assist in debt repayment provided market conditions are favourable. Now home prices are rising again, and home equity loans are coming into favour.

Corrections in Equities Markets Are Common

Corrections in stock markets are entirely common. Over time, the ups and downs tend to favour the investor. In the 50 years between 1965 and 2015, the S&P 500 index went through 27 corrections (10% +), yet it recovered every single time. These corrections are transient, not long-lasting. After a correction, investors tend to buy back into the market with greater enthusiasm, helping to propel markets off their lows.

The best thing to do during a stock market correction is to gather up money so that you have resources to buy on the dip. People who tend to sell stocks before the market corrects, or as it corrects, tend to lose money. Experts caution that all investors should sit it out, and allow the natural process to complete. For those who are nearing retirement, it’s a different ballgame. Since time is of the essence, you may not want to lose money after a correction, so a rebalancing of a financial portfolio from equities to bonds or cash is warranted.