Periods of market volatility can trigger emotional responses in investors. You may feel upset or worried. It happens. And it’s normal. Especially when the financial headlines are blaring with words such as panic and collapse. Your first instinct may be to abandon the markets, but be cautious for that may only create turmoil for your long-term financial plans.
Before taking action, it may serve you well to ask yourself some basic questions first.
Have my long-term needs changed?
Watching your assets decline daily is a valid enough reason to keep you awake at night. If a boat you were on began sinking you would be naturally inclined to jump off, right?
Keep in mind, bear markets are as much a part of the business cycle as bull markets. That’s why it’s so important to think rationally before acting when markets change. Stay in sync with your life goals and changes that happen along the way. As you get older you might have more financial obligations. Are those obligations in line with your long-term goals?
You should also work closely with your advisor. He or she will help make sure your plan and portfolio stay in sync with your needs, goals and risk tolerance. It may be difficult at the moment, but waiting out a market downturn may be your best course of action. Review your financial plan and the goals of you and your partner. Are they in sync? Are you leaving anything out?
What are my needs for liquidity?
Do you depend on your stock assets for current income? If not, you may want to hold off doing anything during a period when stock values have declined. It's important to remember that stocks generally serve investors best when they are used to meet long-term, not short-term, needs. If history has shown us anything its that overreacting to a stock market decline may bring losses that you will regret incurring when the market rebounds. If you do need the income now, what is your plan when accessing the funds?
Set up a game plan to deal with liquidity needs. Consider the type of account you will use and the tax implications you might encounter.
What is my risk tolerance? Has it changed?
Difficult markets help you find out what your true temperament is. If volatile markets bring too many sleepless nights, then you may want to begin considering a more conservative portfolio. Alternatively, if you view a major decline as an opportunity to buy stocks at a significant discount, you may be willing to take a more aggressive approach to your investments.
Review your finances and your goals. Things change, and so should your portfolio have based on your goals for retirement. Test your temperament for market volatility and consider all scenarios. Test your plan for all types of markets.
Does my risk match my attitude?
If a market decline has revealed your true temperament for risk, the next step is to make sure your current holdings match your preferred style. Talk to your advisor about your long-term goals and how you are invested currently today. It's important that you be realistic and put your emotions aside.
Is my investment strategy appropriate to any market environment?
It’s easy to let the current state of the market influence your investment strategy. But constantly reacting to the present issue may not serve your long-term goal well. Three principles that serve well when investing in any type of market:
Test your allocations: Allocate your holdings across the major asset classes, such as stocks and bonds, to help you pursue optimal returns for the risk level you are willing to undertake.
Test the diversification of your portfolio: Diversify within each asset class to gain exposure to different investment styles, such as growth and value, and to various sectors of the market.
Rebalance your holdings: Periodically adjust aftermarket activity and keep your current asset mix in line with your desired goals and risk tolerance. No investment strategy can ensure profits or protect against losses.