Maintaining Perspective During a Market Downturn

While investing during a bull market can sometimes be fun and exciting, it is essential to remain calm when the market turns the other way. This is often difficult to do when you turn on the news and all you see is gloom and doom. Many investors consider running for the hills and liquidating their portfolios; but doing so can cause havoc on your long-term financial goals. It is best to take a deep breath and ask:

1.      Have my long-term goals changed?

What are you investing for? For some, they are putting money away to live off of in retirement; for others, saving for a new boat in the next few years, and everything in between. When the market takes a downward turn, it is important to ask yourself if any of these things have changed as a result. Working with a financial planner can make it easier to define these goals, and construct a strategy to achieving these goals, as well as keep you on track to achieve them in accordance with your risk tolerance and immediate liquidity needs.  Ask yourself, does my strategy still keep me on track to achieve my long-term goals?

2.      Has my risk tolerance changed?

When you first started working with a financial planner, you likely sat down and discussed your risk tolerance toward market volatility. Depending on the individual, you may have been put into a risk category, such as moderate or aggressive, or given a risk score for a more accurate picture. A market downturn will help you better understand your true appetite for risk. If the volatility of the market is keeping you up at night, it may be a good idea to dial your risk back. If you are looking at this as a buying opportunity, it may be appropriate to become more aggressive.  Working closely with a financial planner, you can determine how these changes in risk will have an impact on your overall plan. A market downturn may be a good time to reevaluate if your investment portfolio matches your attitude toward risk.

3.      Do I have an immediate liquidity need?

It is important to determine where how your income needs are met. People tend to rely on a combination of income from Social Security, pensions in some cases, and a portion of their investment portfolio. But taking a deeper dive into what parts of your investment portfolio are providing income may help paint a more complete picture. Are you using capital gains to fund your goals, or are you using income from interest and dividends? A financial planner can help you determine what steps you need to take to meet your immediate needs, without causing havoc on your long-term plan. If you do not need your equity assets to fund your short- term needs, you may not want to do anything. Generally, people look at these assets as the most liquid, but it would be good to remember that stocks are generally best suited as longer term investments. Overreacting to a market decline could bring losses in the short term that cause long term problems. 

4.      Am I following a plan that is suited for any market environment?

It is easy to feel good about your financial plan when markets are good. It is just as common to want to scrap your entire plan when the market isn’t doing well. You may be tempted to sell all of your stocks, but these types of reactions may have severe consequences on your overall goals in the future. It is best to maintain a diversified allocation across the major asset classes according to your risk tolerance. It is equally important to rebalance your portfolio on a regular basis to keep your allocation in line.  In addition, many financial planners have the capability to stress test a financial plan.

I’ve been told over and over in my life “if you don’t know the answer, ask someone who does”. Working with a professional financial planner, who knows your goals, outlooks on the market, and temperate for risk, can help you answer these questions and construct a path forward. During difficult times, it is natural to want to do something. Meeting with a professional financial planner and reexamining your financial plan can help satisfy that urge that could keep you from inadvertently disrupting your long-term goals.