First off, “Don’t panic!” That’s the #1 piece of advice for investors in a volatile stock market—and for good reason. Investors make notoriously bad decisions when driven by emotion, especially fear. You need a cool head to assess your opportunities in a market downturn. And yes, there is potential for positive outcomes.
If the recent stock market roller coaster has you declaring, “The sky is falling!” here’s how to craft a smart strategy going forward:
1. Expect Market Cycles
First, it’s important to understand the nature of the stock market. Up-and-down cycles are normal, expected occurrences that most experienced investors take in stride. Downturns are an inevitable part of owning stocks.
One way that experts measure peaks and troughs is with a stock market index, such as the Dow Jones Industrial Average or Standard & Poor’s 500. These market indexes track price changes over time by using selected stocks to represent the entire market.
Here are typical cyclical downturns that stock market indexes measure:
Market pullback – A short-term 5% drop in the value of stocks. A pullback is a temporary blip during an upward market trend.
Market correction – A decrease of at least 10% in stock prices from a recent market high. Market corrections occur on roughly an annual basis and can unfold over weeks or months.
Market crash – A decrease of at least 10% in stock prices over the course of a day or two.
Bear market – A decline of 20% or more in stock prices from their 52-week high. Bear markets are generally measured in months.
2. Don’t Try to Time Your Investments
Avoid the temptation to time your investment moves according to stock market cycles. Even market veterans—from single investors and day traders to brokers and financial advisors—have a poor track record of predicting exactly what will trigger a market swing and when it will happen.
Never rely on timing the market’s short-term gyrations to meet your investment goals. Stock market success is a long-term game. The classic adage still holds: “Time in the market is more important than timing in the market.”
3. Take the Opportunity to Reassess Your Portfolio
Are your investments balanced to reflect your risk tolerance? Does your stock/bond mix still match your earning goals? How soon must you start withdrawing retirement income? If you feel that a portfolio re-balance is in order, consult with your financial advisor and thoughtfully develop an asset allocation that you can feel comfortable with when the investment waters get choppy.
4. Look for great buying opportunities
If you can afford to buy and you take a long-term perspective, a market downturn can be a good time to add to your portfolio. You may be able to purchase quality stocks that were previously out of your price range.
Has the recent market madness made you rethink your investment strategy? Contact FJY and we’ll help you assess how well your portfolio is set to weather market shifts and reach your investment goals.