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How To Prepare For A Market Downturn

| November 14, 2018
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You don’t have to be an investment expert or a portfolio strategist to know that 2017 was a banner year for stocks. Both the Dow Jones and the S&P 500 celebrated the launch of 2018 by reaching record highs (1), and in August, the S&P 500 surpassed a new high, closing above 2900 for the first time. (2) Up until September, we experienced the longest bull market on record. (3)

But market fluctuations are a normal and expected part of the economic cycle, and what goes up must come down. In October, the volatility index hit its highest level since February, (4) which was the most volatile month we’ve seen since 1996. (5) And at the end of October, the stock market fell drastically, wiping out all of 2018’s gains to date. (6)

In the last couple of decades, there have been several significant downturns that set many people back in their retirement plans. In fact, there have been 16 down-bear markets in the last 90 years. In light of the recent market roller coaster ride, you may be wondering what you can do to prepare your portfolio for a downturn. Here are some tried-and-true financial principles that will help you keep your money and your emotions in check when the market takes a turn for the worse.

Avoid Emotional Financial Decisions

First, let’s talk about what you shouldn’t do. One of the most important rules in investing is to refrain from making emotional decisions. 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.

You also don’t want to start making major changes to your account in anticipation of a market downturn. Erring too much on the side of caution too many years ahead of retirement may prevent you from gaining the potential returns you need to retire on your terms.

Adhere To Time-Tested Principles

If you want to feel confident during a time of market turmoil, be prepared and knowledgeable about how your portfolio can handle market volatility. Here are a few ways you can accomplish this.

Start With A Firm Foundation

We’ve all heard about the importance of diversification when it comes to maximizing our investments. But as you get closer to retirement, it’s even more important to make sure you are appropriately invested. This is the time to reduce your risk and ensure that you have the right asset allocation. In this way, you can minimize the impact that any one declining investment holding can have on your overall portfolio performance.

Your portfolio should be reviewed annually to ensure that it still reflects your appropriate level of risk. If it doesn’t, you may need to rebalance to keep your portfolio on the right track. Rebalancing consistently is one of the most proactive measures an investor can take to avoid feeling the burn of a market downturn.

Have A Long-Term Perspective

The markets are always changing. If you check your portfolio performance every time there’s a shift in the markets, you will end up feeling overwhelmed and stressed. If you maintain a long-term perspective and stay disciplined in your approach, especially if you’re more than ten years away from retirement, you can feel confident in your plan.

Know the Facts

Market cycles are a fact of life. The more you prepare yourself for the inevitability of a downturn,  the better your emotions and thoughts will fare. When the market does start declining, remember that it’s only temporary and, if you’ve done your due diligence, you don’t have to fear it.

Avoid falling prey to the media, which tends to exaggerate. Instead, stick to the information you’ve gleaned from your financial professional and what you know about your personal risk tolerance and goals. If you’ve taken the time to follow through with all of these steps, you may not need to take action during a market slump, and it may make more sense to stay the course.

Prepare Yourself

The only long-term guarantee in investing is that there will be short-term fluctuations. We’ll experience bull and bear markets in the decades ahead just as we have in the past decades. Rather than fear change, focus on preparing for it. If you have questions about your portfolio or investment goals, we at Hayden, Biel & Associates would be happy to meet with you and discuss how we can help. To get started, contact me at (626) 529-8347 or email me directly at ricky@hbawealth.com.

About Haydel, Biel & Associates

Haydel, Biel & Associates is an independent financial advisory firm serving individuals and families near Pasadena, California. The firm was founded in 2004 by Chris Haydel and Ricky Biel with a desire to provide unbiased, client-centered, community-based financial advice. Together, they have built a practice that has grown into a family of caring, smart professionals committed to blending proven investment methodologies with creative financial technologies that make it easier than ever to accomplish your goals. They strive to keep things simple and fun to give their clients peace of mind and alleviate financial stress. HBA Wealth takes care of their clients’ needs first and foremost and goes the extra mile to make their clients’ finances grow. To meet and see how the HBA Wealth team may be able to help, contact them today at (626) 529-8347 or email Ricky directly at ricky@hbawealth.com.

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(1) https://www.reuters.com/article/us-usa-stocks/sp-500-tops-2700-on-tech-advance-dow-nasdaq-hit-records-idUSKBN1ES0YL

(2) https://www.cnbc.com/2018/08/29/us-markets-us-canada-trade-talks-in-focus.html

(3) https://www.cnbc.com/2018/08/21/us-markets-china-us-talks-jackson-hole-summit-on-the-agenda.html

(4) https://www.businessinsider.com/vix-price-stock-market-fear-gauge-2018-10

(5) http://www.carsonwealth.com/insights/market-commentary/weekly-market-commentary-march-19-2018/

(6) https://www.cnn.com/2018/10/24/tech/tech-earnings/index.html

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