The markets took a big dip in early February, with the Dow Jones industrial average losing 1,500 points for the first time in a single day and the S&P 500 down more than 4 percent. Although they’ve rebounded a bit, the CBOE Volatility Index, which measures fear in the market, showed its biggest increase in history. After a banner year for stocks and the second longest bull market since 1929, many investors, especially those close to retirement, are nervous and are wondering what they should do during a market decline. Here are some tried-and-true financial principles to revisit during a market decline.
At times like these, it’s important to put current conditions into perspective. This is not the first time the market has taken a tumble and it won’t be the last. Declines in the Dow are fairly regular events. In fact, drops of 10 percent or more happen about once a year on average.
There’s an old saying that the best thing to do when you meet a bear market is the same as if you were to meet a bear in the woods: play dead. While easier said than done, successful long-term investors know that it’s important to stay calm during a market correction. Multiple studies have analyzed how our emotions affect our investing results, especially when we chase above average returns. A 2015 DALBAR study revealed that investors’ decisions were the biggest reason for underperformance. Simply put, behavioral biases lead to poor investment decision-making.
Market volatility has increased in recent years and the media can often make it seem like each episode is worse than the one before. In reality, volatility does not hurt investors, but selling when the market is down will lock in losses.
Know your risk number
If you don’t know your risk level, you can’t have complete peace of mind about your portfolio. Having too much risk can subject you to greater losses in a market decline, and having too little risk can mean not reaching your goals. Every investor’s risk preference is different, based on their unique situation and personality. It’s important to understand your personal risk preference so you can ensure that your portfolio reflects your tolerance and you aren’t caught off guard when the market experiences ups and downs. We offer an online risk assessment tool so you can find out where you stand today.
Stick to your strategy
We understand that volatility and market declines are stressful. However, we encourage you to keep in mind that while the stock market may be down significantly, your portfolio is made up of stocks, bonds and other assets that are designed to work together to decrease overall losses. If you stay true to your investment strategy and avoid making decisions when emotions are running high, you won’t run the risk of losing even more.
A wise investor needs to learn to ignore the “trees” and keep their eyes on the “forest,” or the historic long-term market returns. We have built your financial plan and investment strategy for the long term, with short-term volatility in mind. It’s important to consider your specific portfolio, investment horizon and circumstances when reflecting on economic events. A decline can be upsetting, but there’s no reason to deviate from your long-term financial plan. If you have questions about your portfolio, get in touch with our office.
Partner with a professional
The only long-term guarantee in investing is that there will be short-term fluctuations. We’ll experience bear and bull markets in the decades ahead just as we have in the past decades. Rather than fear change, focus on being prepared for it. Whether you’re new to investing or an experienced investor, it’s helpful to consult with an objective third-party. Human nature causes us all to act out of emotion when our accounts go down. Find a professional with the knowledge and experience to help you make informed financial decisions that aren’t drive solely by emotion.
Don’t let the market ups and downs get you down. By keeping a long-term perspective, staying calm and educating yourself, you can put yourself in the best position to weather the storms the economy brings your way.