By Schwab Center for Financial Research
Bouts of market volatility are an unnerving, but normal, feature of long-term investing. They’re not fun, but you can expect to see market declines periodically throughout your investing career.
Yet it’s hard to sit still when the market is sliding. You can’t help but think: “Shouldn’t I be doing something?” Every investor is different, but here are a few steps that everyone should consider.
During market volatility:
1. Resist the urge to sell based solely on recent market movements
Selling stocks when markets drop can make temporary losses permanent. Staying the course, while difficult emotionally, may be healthier for your portfolio. This doesn’t mean you should hold on blindly, but we suggest taking into account an investment’s future prospects and the role it plays in your portfolio, rather than being guided by noise and fear.
2. Adapt your trading to fast-moving markets
If you must trade during volatile markets, take current conditions into account when entering orders. There are defensive steps you can take to protect an unrealized gain or limit potential losses on an existing position, such as stop orders and stop-limit orders. These can help give you more confidence when markets are volatile.
3. Take the long view
Markets typically go up and down, and you’re likely to experience several significant declines during a long investing career. But even bear markets — that is, periods when the market fell by more than 20% — historically have been relatively short when compared to bull markets. Because timing the market’s ups and downs is nearly impossible, but all investors would do well to ignore the noise and stay focused on their plans.
4. Review your risk tolerance
Some investors learn the hard way that they aren’t as willing to face a sharp drop in the value of their portfolios as they had assumed. Similarly, risk you took on years ago may no longer make sense given your current situation and life stage.
An aggressive allocation has historically gained more over time, but at the price of greater volatility — which can be especially risky if you don’t have much time to recover. Market downturns sometimes can be a wake-up call to consider adjusting your target asset allocation of the level of risk in your portfolio doesn’t match your situation.
5. Make sure you have a diversified portfolio
Volatile markets also can reveal that portfolios their owners thought were appropriately diversified in fact aren’t. If you haven’t looked at your portfolio recently to make sure you understand what each asset class is doing and that the mix matches your target asset allocation, now is a good time to become reacquainted with it.
6. Consider including defensive assets for more stability
Defensive assets, such as cash and cash equivalents, Treasury securities and other U.S. government bonds, can help stabilize a portfolio when stocks are slipping. Also, if you expect to spend from your portfolio within the next few years, it’s a good idea to hold those funds in assets that historically have been relatively liquid and less volatile than stocks, such as cash and short-term bonds. This can help you avoid having to sell in a down market.
7. Rebalance your portfolio as needed
Market changes can skew your allocation from its original target. Over time, assets that have gained in value will account for more of your portfolio, while those that have declined will account for less. Rebalancing means selling positions that have become overweight in relation to the rest of your portfolio, and moving the proceeds to positions that have become underweight. It’s a good idea to do this at regular intervals.
Lawton Retirement Plan Consultants, LLC (LRPC) Monday Morning Minute is crafted to provide decision-makers with important information about the economy, investments and corporate retirement plans in a format that allows a reader to consume the information in less than 60 seconds. As an independent, objective investment adviser, LRPC has access to many sources of research and shares the best and most relevant information with its readers each week.
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This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, a plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges, and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.
Additional Important Disclosures
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Supporting documentation for any claims or statistical information is available upon request. Investing involves risk, including loss of principal. Past performance is no guarantee of future results. Fixed income securities are subject to increased loss of principal during periods of rising interest rates. Fixed-income investments are subject to various other risks including changes in credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Lower rated securities are subject to greater credit risk, default risk and liquidity risk. Diversification, asset allocation and rebalancing a portfolio cannot assure a profit or protect against a loss in any given market environment. Rebalancing may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events may be created that may affect your tax liability. Indexes are unmanaged, do not incur fees or expenses and cannot be invested in directly. The S&P 500 Index is a market-capitalization-weighted index comprising 500 widely traded stocks chosen for market size, liquidity and industry group representation. The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.