What you should do and what you shouldn’t do during a prolonged decline
When you see your investment value drop, it’s normal to feel a bit worried. You may be wondering, “Is that what a bear-market looks like?” What should I do?
Marci McGregor is the head of Portfolio Strategy at Merrill and Bank of America Private Bank. She explains that a bear market occurs when the S&P 500 drops by more than 20% from its peak. Since 1928, there have been 21 bear markets for the S&P 500, and they last, on average, less than a calendar year.
Market downturns can be unsettling. However, there are ways you can keep things in context and even gain from them. McGregor, along with other CIO experts, has provided seven tips to help you survive a prolonged downturn.
1. It’s easy to react impulsively when the market is in a slump. You may want to withdraw your money and wait until things improve. This can cause costly mistakes because it is not always clear when to enter the market. If you sell when the market is low, you could lock in a loss for life and miss out on the recovery. It is important to remain in the market over the long term and not try to time the market.
TIP: Be patient, Tune out the Daily Ups and Downs of the Market, and Stay Focused on Your Long-Term Goals.
2. It’s easy to overlook how difficult it can be to lose the value of your assets in a bull market. It’s a good idea to discuss your risks with your advisor if you are nearing retirement. Investors with a longer time horizon can often handle volatility in the market. McGregor says that if you are looking to access your investment funds soon, it is best to take a conservative approach.
TIP : consider moving assets you might need in the future into Treasurys or Money Market Funds
3. Diversify your portfolio. Matthew Diczok is the head of Fixed Income Strategy at Merrill Lynch and Bank of America Private Bank. You can smooth out the ups and downs of the stock market by combining bonds and cash.
TIP: Look for ways to diversify your portfolio both within and across asset classes.
4. You can increase your chances of buying stocks at lower prices by investing at regular intervals. They may even rise in value as the market recovers. Dollar-cost averaging is a strategy that can be effective when the market goes down.
TIP Automate regular contributions to your investment accounts, and consider reinvesting dividends.
5. When the market is down, look for opportunities. Companies with solid balance sheets and defensive stocks, such as consumer staples or healthcare, may offer good opportunities. Dividend-paying stocks of higher quality, and especially those from companies that have consistently increased their dividends, can help you boost your return on investment when the stock market is falling.
TIP: Look for opportunities to buy stocks that are likely to be volatile – such as those that were overvalued in the past.
6. Rebalance your investment portfolio. This is the time to correct any imbalances. Consider moving assets to correct any imbalances if your portfolio has deviated from your strategic plan. If your stock portfolio is growing beyond your asset allocation target, you may want to consider rebalancing a portion into bonds.
TIP: Doing this regularly can help align your portfolio with your goals, timelines, and risk tolerance.
7. Remember that markets have always bounced back, no matter how deep or long the downturn. McGregor says that bear markets have occurred in the past and that history has shown markets to recover and grow even higher than they were before. Investors who remain calm and disciplined in a down market will likely avoid making common mistakes and may even enjoy better times to come. The longer you invest, the more likely you are to achieve your long-term goal.
TIP Stay connected with your advisor during any extended downturn. They can help you understand the risks and potential opportunities and can suggest how you can react to stay on track while pursuing your goals. As the markets recover, they can assist you in taking advantage of new conditions.
Profit from the market’s decline
Reduced asset values can be a great opportunity for financial planning. Consider the following strategies:
Tax loss harvesting. You may be able to offset gains on your investments by selling underperforming securities at a profit.
Roth IRA Conversions. If asset values are low, you may want to convert traditional IRA assets into a Roth IRA. As assets are taxed at conversion, lower asset values may result in a smaller tax bill.
Estate moves. You should review your estate plan as you may find it beneficial to fund trusts or make certain gifts at lower asset prices.