If you’ve been investing money for any amount of time, you know the uneasiness you can feel when the markets are down. It’s your money, so of course, it can feel uncomfortable watching any amount decline.
However, don’t let these moments of fluctuation guide you to a decision you’ll regret later.
What do we mean by this?
Fluctuating markets are a normal part of long-term investing. They move in cycles, which means sometimes they’re up. And, unfortunately, sometimes they’re down.
And sometimes, you’ll see sharp, momentary declines that grab headlines and spike fear in every investor around.
But, as history proves, when markets decline, they always recover — yes, even the worst crashes. Some downturns may be days. Others may be years.
Here are five of the largest crashes in history. Each time, they bounced back. But as you can see, the biggest difference is the amount of time it took.
The COVID-19 crash in 2020
- Market loss: 34%
- Time to recover: 33 days
The mortgage crisis in 2008
- S&P 500 loss: 57%
- Time to recover: 17 months
The dotcom bubble in 2000
- Nasdaq loss: 77%
- Time to recover: 15 years
The oil crisis and economic recession in 1973
- Market loss: 48%
- Time to recover: 21 months
The great depression in 1929
- Dow loss: 89%
- Time to recover: 25 years
Yes, crashes and downturns are just part of investing.
But try not to worry. Because as history proves, your investments will make up their losses over time. The key is to stay the course, and most importantly, don’t sell your investments.
Now, you may be wondering — is there anything you can do to make sure your investments are in the best possible place while experiencing market declines?
Absolutely!
Here’s how to best prepare for market volatility.
Diversify your portfolio
You’ve probably heard the term, “don’t put all your eggs in one basket.”
Why? Well, if you drop that basket, you lose all your eggs.
The same goes for your investments. When you divide your money into different assets, you’re much more likely to reduce risk and volatility. This may be anything from stocks and bonds to target-date funds or index funds.
ETFs and mutual funds are a great way to diversify your portfolio, but always be aware of trading costs or other hidden costs.
Review your risk tolerance
Risk tolerance is the level of risk you’re willing to take with your investments. Anytime you invest, it’s important to understand that some sort of risk is involved. This means you could lose money.
Ask yourself this question. Is protecting your portfolio more important than high returns? Or would you rather risk losing some money for the potential of big returns? Everyone will have a different answer when it comes to this question. Some may love the adventure of high risk/high return. Others may feel uneasy with that amount of risk and prefer a lower risk/lower return.
So yes, while you can’t control what the market does, you can control the amount of risk you’re willing to take.
At TruthPoint Financial, new participants take a free risk assessment so they know if they’re a conservative, moderate, or aggressive investor…or anything in between. If you’re interested in knowing your risk level, give us a call.
Rebalance your portfolio
When you initially chose your investments, you decided on a certain asset mix that fit your risk tolerance and investment goals. Over time, it’s likely that the weight of your asset classes in your investment portfolio will change. When this happens, your portfolio is no longer aligned with your preferences.
Here’s an example. Let’s say you invested $5,000 in stocks and $5,000 in bonds. After a year, you checked your investments and noticed that your stocks were performing well and now valued at $8,000. But the bond wasn’t performing as well and was now valued at $3,000. This is when rebalancing comes into play. To get back to that 50/50 split, you will either need to sell some stock or buy bonds.
This is why rebalancing your portfolio is important. It allows you to maintain your level of desired risk.
Talk to a financial professional
The key to surviving market slumps is to not overreact. If you sell after they have fallen, you won’t regain your money when the market inevitably rebounds.
Just like you would see a mechanic when you’re having car issues, you should talk to an advisor if you’re concerned about your investments. At TruthPoint Financial, we care about your investment decisions — just like you do. For solid, friendly investing advice, give us a call!