Investment Uncertainty: 4 Things to Do After a Drop in the Market
After a 9-year bull market, lately there have been rumblings of a market correction amid some rather startling episodes of market volatility. The DOW fell by 12% (3,200) over the course of two weeks earlier in February, and other market indices took similar hits.
If you are approaching retirement, this is the kind of thing you dread. You have a limited number of years until retirement, so any sharp downward movement feels as if it could have a profound impact on your ability to live comfortably after you stop working.
It’s also something with which you have probably grown familiar. After all, volatility and risk are a natural part of investing. They happen for a variety of reasons. Sometimes they are due to fundamental problems in the economy, as was the case in the steep drop in 2008 and 2009. Other times, like in the case of last year’s Brexit, drops are caused by outlier events that seem to shock investors and money managers.
Regardless of the cause of the drop, the question is how best to respond. Do you stay the course? Sell all your investments and move to safety? Carefully analyze and recalibrate your portfolio?
There are no universal answers for every investor. Your best response depends on your unique needs and goals, as well as your tolerance for risk. However, there are some general principles that are helpful to most investors. Below are a few possible courses of action to consider after you see a sudden decline in your portfolio:
1.) Do Nothing
One course of action is simply to do nothing. Granted, that may be hard to do if you see your retirement balance in free fall. You may feel a great need to “do something,” even if you don’t know exactly what that “something” may be.
However, falls in the market are often followed by rebounds and upward movement. As of this writing, the markets have already nearly regained former levels, and the Nasdaq is down just 1% for the month of February. In fact, a study from Betterment found that weeks in which the market drops 5 percent or more are often followed by periods of substantial positive return. By doing nothing, you have the opportunity to stay invested and potentially capture that upside.1
2.) Take a Break from Financial News
It’s hard to sit and do nothing when all you hear is negative news and information about the state of the economic world. This may be a good time to get away from your primary sources of financial information. Turn off the news. Get away from the internet and social media.
Instead, go for a walk. Play a round of golf. Disconnect and spend time with loved ones. After a break from the negativity, you may find that your concern has dissipated and that you don’t have as much urgency to take action.
The media—both on television and online—has a way of reinforcing our current emotions. If you are already concerned about your investments, negative information may only serve to heighten that concern. Remember, no one—including televised prognosticators—has the ability to predict the market’s short-term movement. Take a break from media so you don’t panic and take action that may not be in your benefit in the long term.
3.) Deposit Funds and Rebalance
A downward shift in the market is one of the biggest ways a portfolio can become unbalanced. Some of your investments will drop more than others. Some investments may not even drop at all. The result is that your current allocation may not look like your target allocation.
This could be a great time to add funds to your portfolio to rebalance the allocation. You may be able to take advantage of the market’s drop and buy shares in asset classes that had the biggest decline. That could bring your portfolio back to the correct allocation, and it may give you an opportunity to take advantage of any possible recovery.
4.) Turn Down the Heat
If you implement all of the steps above and still can’t get over your deep concern or your urge to take action, that could be a sign that your current allocation isn’t right for your risk tolerance. Perhaps you’re allocated too aggressively and need a risk profile that offers reduced risk and volatility.
You may not want to sell everything and rush to safety. However, this may be a good time to speak with your financial professional and analyze your current allocation. Look for opportunities to reduce risk without eroding growth potential. Perhaps a shift in allocation or even the use of tools like an indexed annuity could help you achieve that objective.
Feeling nervous about the markets? Contact us today for a free initial review of your investments. We will be happy to analyze your portfolio, provide an opinion and make recommendations. Let us discuss your investment concerns, and help you find peace of mind!
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