Here’s how to turn the gut-wrenching test of a market correction to your advantage

Now is the time for your portfolio manager to earn their fees by helping you derive a plan of attack

Market corrections can be a gut-wrenching test of an investor’s tolerance for risk. The typical behavioral responses during times of turmoil are to either avoid the situation, in the hopes it will go away, or to react out of frustration — both of which can have dire consequences. Instead, now is the time for your portfolio manager to earn their fees by helping you derive a plan of attack, with the goal of mitigating further losses and using the worsening volatility to your advantage by positioning for the ultimate recovery.

For those wondering where to start, here are three areas that we are focusing on with both our new and existing clients that can at the very least point you in the right direction.

Be a contrarian

Being a contrarian during market extremes can be difficult, but the approach showed its merit when the euphoria turned into panic, and it will do so again when emotions calm down and the negativity ultimately dissipates. It is particularly tough being on social media these days, especially when it seems to be dominated by those taking glee in the downturn, almost hoping for it to be followed by an economic recession. If you find the negativity is inescapable, try to change your mindset by focusing on the long game:  history has shown that those that bet on the house during such times usually win. That doesn’t mean taking excessive risk, but rather having a plan to carefully position for the recovery and sticking to it.

For example, right now I am one of the few market watchers refusing to throw a taper tantrum on a paltry increase in the Fed rate to one per cent. Actually, I think there is plenty of room for higher interest rates without sending the United States into a full-blown recession. If your portfolio depends on rates staying lower, my question is: Why fight the Fed?  Instead, adjust your duration exposure and start looking at those regions or segments that benefit from persistently higher inflation, such as financials, energy, materials and industrials. All of these have a positive correlation with 10-year Treasury rates.


For the past year we’ve moved our bond exposure to its lowest level ever, which has really helped our performance. As inflation remains stubbornly high, with the U.S. posting an astounding 8.3 per cent CPI print for April, central banks will have to raise interest rates or watch their currencies get beaten down. The Bank of Canada, for example, will have to choose between hiking rates on households that are among the world’s most leveraged or standing pat and watching the loonie collapse as the Fed raises rates, making the U.S. dollar more attractive.

The big question is how should investors replace their bond exposure? In order to hedge against a Bank of Canada policy mistake, we’ve moved the majority of our existing positioning out of Canada to U.S. floating-rate notes and some U.S. inflation-protected notes. We’ve also been adding to structured notes that we consider to be an equity/bond hybrid given their attractive yields, ranging from six to 20 per cent and downside barrier protection ranging from 20 to 40 per cent. Since we’re already short equity duration with our portfolios, we’ve been slowly adding to those long duration but fundamentally sound names such as Microsoft on the correction.

Harvest capital losses and upgrade your portfolio

Now is a great time to start harvesting capital losses by selling those fundamentally broken positions and replacing them with ones that will benefit from the ultimate recovery. For example, we’ve almost completely moved out of Europe as the region’s all-or-nothing renewable-energy policy paired with what’s happening with Russia could send it into a recession, even potentially a deep one.

Emerging markets, especially China, are also cause for concern due to ongoing Covid-19 lockdowns. These are further disrupting supply channels that we think will accelerate the movement of manufacturing back to developed markets, with the willingness for consumers to pay higher costs for greater stability in product supply and availability.


  1. Martin Pelletier: The markets are throwing a tantrum, but this time central banks may not bail them out
  2. Martin Pelletier: Two common mistakes that can cost investors in these volatile times
  3. It’s hard to do, but sometimes investors have to

Finally, we believe the Canadian S&P TSX makes for an excellent replacement for these regions and we are overweight for the first time in a long time, thinking it has the potential to outperform like it did from 2000 through to 2008.

Focusing on these three areas doesn’t guarantee you will avoid all the pain from the ongoing correction, but it will help ensure you are well positioned to benefit from the ultimate recovery.

Source: Financial Post