What To Do When Markets Fall
We help clients accept market declines as normal and structure portfolios so short-term pain doesn’t injure their long-term wealth creation.
History teaches us that the stock market always, always goes up over time. But anyone invested in it needs to accept that it can drop suddenly. A 20% plunge occurs about every 6 years on average. But it’s helpful to accept that it could plunge tomorrow, almost randomly. A sudden decline in stocks is gut wrenching, for everyone. It’s not however an anomaly nor a failure of market. It is a recurring feature of long-term investing and one of the main reasons long term investors are rewarded for staying invested.
Don’t panic. When markets fall, the instinct to sell is strong. But selling when the stock market is down is almost always the worst thing to do. While it’s always your money and your decision, our role is to help clients avoid emotional mistakes that can permanently lock-in losses.
A key reason not to sell is that when the market rebounds, it’s not uncommon to have one of two days of even 10% upside. Catching these has a significant effect on the long-term value of your portfolio.
Don’t try to pick the market boom. You won’t find many people in Wall Street who think even they can successfully buy at the lowest point of a market decline, before prices start rising again. It’s almost impossible, because you can’t see what’s going to happen tomorrow. You only know the stock market has bottomed months into the future, when you can look back.
Buy Bonds. Part of a financial plan involves us thinking about what you are going to do when the market inevitably falls. Particularly if you are drawing on your savings to fund your lifestyle in retirement. This is precisely why we typically put a proportion of a client’s portfolio in bonds. In times of crisis, they usually hold their value, if not rise slightly as interest rates almost inevitably fall. Bonds become the assets that a client can sell to pay their bills, so avoiding being a forced seller of stocks at depressed prices. As detailed in other sections of this website, we work hard with each client to determine the amount of money that’s right for them to have in bonds, mainly dependent on how much risk they are willing to take, whilst not constantly feeling unnerved.
Diversify. We allocate our client’s money into different parts of the stock market, internationally and in alternative investments. Putting eggs into many different baskets seeks to lower risk because historically not all parts of markets move in the same direction at the same time. Losses in one area may be offset by gains elsewhere.
Dollar Cost Averaging. This is a disciplined approach which contributing each month to a 401(k) naturally entails. Investing a consistent amount over time means buying fewer shares when prices are high and more when prices are lower, reducing the pressure to time markets.
We’re here to help. Markets will always plunge at some point, often when you least expect it. We help clients accept that reality and plan, so fear does not drive damaging decisions.
This material is for educational purposes only and is not intended as investment, tax, or legal advice. LPL Financial and its advisors do not provide tax or legal advice. Investment advice specific to your situation should be obtained separately based on your individual circumstances.
Stock investing includes risks, including fluctuating prices and loss of principal.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Bonds are subject to availability, change in price, call features and credit risk.
Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor’s portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.
