How Investors Can Successfully Weather Market Downturns

052925
6 minutes

Knowledge is power, as the saying goes. To that end, we hope this quick reference will help you power up when the market turns down. So, gird your loins and get filled with the knowledge you need to face the future with courage and calm. Let’s say, bring on the rain.

Before a Market Downturn

Diversification. While it won’t eliminate potential losses, diversification can help to buffer the impact of a bearish market. Spreading risk across different asset classes, sectors, and geographic regions allows better-performing investments to offset losses from poorer-performing ones. Since downturns are unlikely to affect every asset class and every market sector in every country simultaneously, a diversified portfolio can be expected to enjoy some insulation from sudden market changes.

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Have a financial plan in place. A good wealth management plan will consider the investor’s goals and risk tolerance, both financially and emotionally. Developing an investment strategy before a market downturn can also help us fight the inevitable urge to move money in and out of the market in reaction to volatility. And while there’s nothing wrong with making changes to the plan, those changes should always align with long- term investment goals.

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During a Downturn: Pitfalls to Avoid

Emotionally-driven investment decisions. While we can’t control market movements, we can control our reactions to them. Psychological research shows that people fear losses more than they enjoy gains, which means we’re prone to irrational decisions when we’re in the throes of market volatility. When considering financial changes, it may be helpful to pause for 24 hours before making any long-term decisions. If it still feels like a sound decision, follow through then; but if not, we may have saved ourselves from a costly emotional misstep.

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Succumbing to anxiety. Market downturns can be a legitimate source of stress, but we can take steps to protect ourselves from feeling overwhelmed by anxiety. Studies show that frequent portfolio checking can distort perceptions of long-term trends; many experts suggest just once a quarter is appropriate. Remember that market dips are inevitable but temporary, and history shows cycles of downturns followed by rebounds. Stay focused on your long-term goal and the strategies already in place to help you achieve it.

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Overexposure to news. As investors, we rightfully want to stay aware of what’s happening in the markets. But consuming too much negative news can begin to distort our thinking. When facing uncertainty, it’s a natural human response to seek more information. We may feel compelled to continually check news sources during periods of volatility, but this only leads to more stress rather than finding solutions. Bear in mind, too, that misinformation and sensationalism thrive in uncertain times. Sticking to news summaries from trusted sources and being deliberate about the amount of time we spend ingesting news can help us stay level-headed and avoid making irrational decisions.

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During a Downturn: Wise Investing

Look for investment opportunities. It may feel counterintuitive, but a market crash might be an ideal time to allocate more assets here rather than pull away. Of course, this is highly dependent on each investor’s situation and risk tolerance, so a discussion with a trusted advisor would be prudent. That said, a correction historically follows downturns. Employing a strategy like dollar-cost averaging can be an effective way to benefit from market downturns without getting into the risky business of attempting to time the market.

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Tax planning. Although portfolio losses aren’t exactly desirable, they do create some opportunities to optimize taxes. While not necessarily advisable for all situations, converting IRAs or qualified retirement plans to Roth accounts while their values are lower may be worth considering. Tax-loss harvesting may also be beneficial as a way to offset taxable capital gains; again, each investor’s unique situation dictates whether this strategy is advisable.

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Strategies for Young Investors

Increase stock investments. A market downturn may be a great opportunity to rebalance your portfolio to allocate more toward stocks. Buying when the market is down can take advantage of future market rebounds– and young investors have the luxury of time to wait out the rough patches.

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Don’t try to time the market. It can be tempting to try, but even the most experienced investors can’t predict market movements. Missing just a few of the best market days can have a significant impact on your portfolio. Instead of trying to predict short-term fluctuations, focus on developing a solid long-term investment plan and maximizing your opportunity to benefit from patience and perseverance.

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Strategies for Retirees and Near-Retirees

Review allocations regularly. As we approach and enter retirement age, the risk our portfolios carry should be adjusted accordingly. In general, the closer we are to withdrawals, the more stable we want our assets to be. Regularly evaluating and rebalancing with the help of a knowledgeable financial advisor can help to protect us from the worst of market downturns.

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Have cash on hand. Keeping enough assets liquid in something like a high-yield savings account or money market fund can help protect against sequence-of-returns risk. This occurs when withdrawing during a down market, which requires taking a higher percentage from your portfolio to fund everyday expenses. Experts suggest having cash equivalents that can fund anywhere from three to 12 months of daily expenses, but each investor’s situation should be taken into account.

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The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Beacon Advisory or Lincoln Investment. The material presented is provided for informational purposes only. When you link to any of these websites provided here, you are leaving this site. We make no representation as to the completeness or accuracy of information provided at these sites. Nor are we liable for any direct or indirect technical or system issues or consequences arising out of your access to or use of these third-party sites. When you access one of these sites, you assume total responsibility for your use of the sites you are visiting.

How Investors Can Successfully Weather Market Downturns

Before a Market Downturn

During a Downturn: Pitfalls to Avoid

During a Downturn: Wise Investing

Strategies for Young Investors

Strategies for Retirees and Near-Retirees

A Minor Setback

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