You may be seeing a lot in the news lately about what to do when the market goes down. For the last several years people have been vehemently predicting a market downturn, but the market doesn’t seem to care. It just ignores them and keeps going up.
The Market Is At An All Time High
In March, the Dow closed above 21,000 for the first time ever, and in May, the S&P 500 finally broke the 2,400 mark. As you can see from the FedPrimeRate.com graph below, the markets are soaring these days.
Summer is traditionally a soft season for stocks, yet they continue to trade at or near record highs. Even volatility has calmed and the markets appear to be ignoring the political arena for the most part. (1)
These record highs are what have led to a glut of advice on market downturns. Yes, the markets will slow down eventually, but they haven’t yet. So, all of that advice isn’t very useful right now. Instead, let’s talk about what you should be doing right now. What should you do when the market is up?
Make Sure You Have an Exit Strategy
With the markets performing as they have been lately, it’s important to make sure your portfolio has sell-side discipline. Having a strategy for when to sell is just as important as a strategy for what to buy!
You may have learned over the years that “buy and hold” strategy may not be an effective approach to managing a larger investment portfolio. Many Baby Boomers survived the tech bubble of 2002, watched their portfolios recover and then were set back (often for years) during the mortgage bubble of 2008.
At 1on1financial, we set triggers for our client’s portfolios, which we monitor to help us determine when we should sell a particular investment. Instead of just asking the fundamental question: “Is this a good company or fund to own?” and the technical question: “Is now a good time to own it?”
Now is a great time to revisit your portfolio to make sure you have an exit strategy in place for when the markets do start to go down.
Don’t Get Greedy
Fight the human tendency toward greed. As we’ve already mentioned, high returns can be very tempting. Rushing after them, though, can lead you to a dangerous place where you don’t want to be.
Make a conscious effort not to get caught up in the hype and stick to your investment plan and corresponding asset allocation. Remember the risk tolerance level that you established for yourself. If you’re unsure how much risk you are prepared to take, our handy Riskalyze tool can help you discover that. Just click on the link to find your risk number.
Don’t let record highs entice you into making poor decisions. Remember, the investments that shoot up are usually the ones that drop the lowest as well. By avoiding greed and rebalancing your portfolio, you will be prepared in case of a market downturn.
Be Prepared For A Correction
The pundits are right that the markets will correct themselves. Eventually. They are usually just wrong on the timing. It is important to recognize the fact of market cycles and prepare for the inevitable downturn.
To prepare your portfolio for a market correction, you need to do what we already talked about. Maintain an asset allocation that aligns with your risk tolerance and don’t get greedy.
Your portfolio isn’t the only thing you need to prepare for a bear market, though. You need to prepare yourself mentally. When the market goes up for as long as it has been, it’s easy to start taking it for granted and expect it to continue. Many people are caught off guard during market corrections and are overcome with fear and anxiety.
Don’t let your emotions get the best of you. As long as you are following sound investment principles, only investing long-term money and keeping your assets within your risk tolerance, you should have no reason to panic. Yes, things may drop momentarily. But you don’t need to start worrying because you’re in it for the long-haul.
How Can I Help?
If you’re not feeling as confident as I am, maybe you could use a portfolio review. I can help you look over things to make sure you have an asset allocation that matches your risk tolerance. Contact me at 909-981-1720 so we can arrange a convenient time and place for us to meet.
Philip A. Board MSFS, CFS, is a retirement planning specialist and the founder of 1on1financial, an independent comprehensive investment firm serving individuals and businesses near Upland, California. Through educational workshops and a non-sales environment, 1on1financial specializes in working with employees of Southern California Edison, UPS, Esri and Verizon.