Weathering a Stormy Market
Stock market corrections can be painful, especially when they’re either more frequent or steeper than many of us would like to remember. Since 1926, the S&P 500 has posted 23 annual declines, and the Dow Jones Industrial Average lost more than a quarter of its value on October 16, 1987. According to Fidelity research, there have been 13 bear markets since 1926—periods when the stock market declined 20 percent or more from peak to trough—which averages out to approximately one every six years.
The markets hit their most recent peak on July 19; since then, the Dow and the S&P are down 34.7 and 38.7 percent, respectively, and the Nasdaq Composite Index is off around 38 percent. It may seem sensible at times like these to dump stocks and head for the safety of U.S. Treasury bonds or even cash. But turbulence in the markets represents an opportunity for the well-prepared investor. Below are some tips for managing trepidation and profiting from the recent market volatility.
1. Ignore the sideshow
In the age of high-speed internet and 24-hour financial reporting, market-moving news spreads around the globe almost instantaneously. While it can certainly be entertaining to listen to the gurus of high finance expound on their views or argue with one another about what the Federal Reserve should do next, don’t let this guide your investment decisions. What happens from day to day in the markets is far less important than what happens over the months and years that your money is working for you in your well-constructed portfolio.
2. Stick to your plan!
This can be the hardest thing to do when the markets turn south. You’ve built your portfolio based on your goals, your age, and risk tolerance. As you move closer to your investment goals—an early retirement, a second home, a well-funded college education for your children or grandchildren—you will likely increase the ratio of bonds to stocks in your portfolio. Bonds tend to decrease overall portfolio risk but decrease returns. Whatever you do, do it systematically, and in accordance with your overarching investment plan. Reacting to the markets is a surefire way to wreck a carefully-constructed portfolio.
3. Rebalance
It is just as important to rebalance after a downswing as it is after a significant run-up in the markets; both events can leave your original asset allocation out of whack. In the current market environment, stock, REIT, and commodity funds have all suffered corrections. If you have set targets in these asset classes, then you may find yourself well below them when you conduct your regular portfolio review. Rebalancing now forces you to sell out of the funds that have been performing well and buy funds that have been hammered by the markets—the classic strategy of ‘buy low, sell high.’
4. Know yourself
Warren Buffett famously said that “success in investing doesn’t correlate with IQ.” Rather, “what you need is the temperament to control the urges that get other people into trouble in investing.” It’s often difficult for us to be objective when it comes to examining our own motives for making a trade. Are we acting rationally, in accordance with an asset allocation strategy, or is emotion driving us? Behavioral finance studies have shown that people will take on much more risk to avoid a monetary loss than they will for the equivalent gain. The clear implication is that fear often dictates many of our financial decisions.
5. Get some perspective
We all have a lot riding on our investments, and it can be tempting to take a “head in the sand” approach to our portfolios during periods of heavy market volatility. Sometimes we just don’t want to review those brokerage account statements. If you find it difficult to rebalance during a down market—and perhaps realize losses on some of your investments—a financial professional may be able to help put things in perspective. Indecision can often be just as harmful to our portfolios as the wrong decision.
Dion Money Management offers managed account services for your IRA, Roth IRA, 401(k) and other retirement accounts. Call one of our Portfolio Strategists at 800-432-7447, ext. 191 to learn about the benefits of our managed account program.
