Market downturns are inevitable. The reason you have the potential to receive higher rates of return on your investments is because you’re taking on this risk. If you’ve decided to invest in the market, you have a chance to be prepared for volatility, rather than be worried by it. The good news is that you don’t have to go it alone.
Market downturns can have many causes—including geopolitical unrest, new legislation, and earnings reports—and advisors have likely seen them all. It’s their job to understand what’s caused this swing and how best to approach it.
Wrapping up our three-part series, this is the Silver Linings Playbook to working with your advisor through a market downturn.
Have an advisor and a solid investment plan—before the downturn happens—and stick to that plan.
As I mentioned in my last piece, it can be tempting to jump ship when the market starts to fall, but those who stick with it may be able to weather the downturn. The reason many may want to have a solid investment plan ahead of time is so they can make decisions when they’re in a rational state of mind. It isn’t strategic to decide what your threshold for loss is while watching market returns go down on your computer monitor. Instead, consider stop-loss rules for yourself within the context of creating an overall investment strategy. A stop-loss order is placed with a broker to sell once the stock has reached a certain price. Applying stop-loss rules to a well-defined financial plan that is tailored to your goals and situation can help you to be ready for the normal ups and downs of the market, and help you avoid making irrational investment decisions.
Ask your advisor if there are moves that can put you in a better long-term position when the market recovers.
For example, during market downturns, some investors consider a Roth conversion—moving money from a traditional IRA to a Roth IRA. The converted amount is generally subject to income taxes, however, a conversion in a downturn may result in a lower tax bill for the same number of shares sold. Also, if people have investments they are looking to sell, a downturn may provide the opportunity for tax-loss harvesting—selling an investment and realizing a loss. Your advisor is there to advise you on how market shifts interact with your tax planning. Tax professionals can also be helpful when determining what may be most appropriate for your personal situation.
"If you’ve decided to invest in the market, you have a chance to be prepared for volatility, rather than be worried by it."
After the market recovers, discuss if there is a need for portfolio rebalancing* with your advisor.
The movement of the markets may change the mix of stocks, bonds, and cash, or the mix of large-cap, small-cap, foreign, and domestic stocks in an investor’s portfolio. When these shifts happen, you can regain control by shifting your approach to get back to your target mix and potentially take advantage of lower prices.
Watching your portfolio take a hit during a market downturn can make it difficult to stay in the game, but a trusted advisor can be your best coach for keeping your focus. The right advisor knows that short-term emotions shouldn’t cost you your long-term dreams.
Check out How to Find the Right Financial Advisor for You to learn more about selecting an advisor that best suits your needs.
*Rebalancing a portfolio involves buying or selling certain assets to maintain the original desired asset allocation within a portfolio. It may result in tax liabilities, involve transaction costs, and does not assure a profit or protect against loss.
Investing involves risk, including possible loss of principal.
The opinions and forecasts expressed are those of the author and individuals quoted and should not be construed as a recommendation or as complete.