Over the long term, stocks have had terrific gains, and if you can stay invested, those gains can change your life. But how can you stay invested when markets are falling?
You’ve probably tried to stay disciplined in previous down markets with mixed results. Maybe you stayed invested through 2008 and regretted it. So, when markets corrected again in 2010, you panicked and sold out immediately. But then stocks bounced back and you ended up wishing you’d stayed invested.
Many investors don’t realize that they can—and should—plan for down markets in advance.
Many investors don’t realize that they can—and should—plan for down markets in advance. They assume that they have to wait until markets fall to know how they should respond, but most of us don’t make our best decisions when we’re stressed or fearful. The real work of navigating down markets usually starts long before markets drop.
You need a plan for down markets
Your investment plan should do the heavy lifting in down markets, so if you don’t have a down market plan in place yet, this is the time to create one. It should include strategies that aim to help you mitigate risk in your portfolio; keep your emotions under control; and decide when and how you’ll change your investments.
Ways to Panic-proof Your Portfolio
1. Mitigate risk in your fund portfolio
Allocation: Start by finding an allocation to stock and bond funds that’s in line with your risk tolerance and your risk needs. Your allocation is one of the best ways to stay invested through the ups and downs of the market. How you feel about risk typically changes over time, so you may need to update your allocation accordingly.
Portfolio: You should also try to mitigate risk within your portfolio by staying diversified and limiting your exposure to riskier areas of the stock and bond markets.
Rebalance: You need to regularly rebalance back to your target allocation to make sure you don’t end up taking more risk than you’d intended. Many investors find it challenging to sell the part of their portfolio that’s doing well and add money to the part that’s lagging. But if you can make rebalancing a habit, you may be able to reduce losses during market declines.
2. Keep your emotions under control
Know yourself: There’s another critical component of your plan, and that’s you. If you panic, there’s not much your portfolio can do to stop you, so pay attention to what helps you keep your emotions under control when markets are in turmoil.
Recognize your triggers: Some investors find that they need to stop opening their statements or checking their accounts online because seeing losses makes them want to do something rash. Others avoid the news, which tends to sensationalize market declines. We once heard from an investor who used to get really upset when markets fell. One day, his wife suggested that he turn off the TV. “You know what?” he told us. “It worked!”
Write it down: The key is to notice what works for you and then write it down, so you can refer back to it later.
3. Decide when & how to change your portfolio
Start small: If you feel like you have to do something in down markets, try to avoid making major changes all at once. Instead, aim to take modest and deliberate action early so that you don’t feel compelled to do something drastic if the market falls further. For instance, you might sell 10-30% of your stocks if it helps you avoid selling 100% later.
Time to rebalance? Declines can be an opportunity to buy stocks at lower prices. If you have a balanced portfolio of stock and bond funds, consider rebalancing and adding to your stock exposure. If you hold more stocks in the market’s eventual recovery than you did during its decline, you could recover your losses faster and even boost your long-term performance.
Get help if you need it
If you find that despite all of your efforts to stay on track through market downturns, you’re still struggling, then it’s time to consider working with an advisor. If you’d like to talk with a FundX advisor, give us a call at 1-800-763-8639.
