Four Things To Do During A Stock Market Downturn

You have undoubtedly read and heard about the whiplash-producing stock market this week because the so-called experts at every newspaper and news channel have been talking about it incessantly. It reminds me of the breathless excitement of meteorologists prior to an anticipated snowstorm. In fact, these “experts” are about as accurate as the weather forecasters too. Part of the reason these trading days have been such a shock to many is that the markets have been so calm for so long. In fact, the market in 2017 exhibited the least volatility of any year in history. So, when we see a drop of 4% in the S&P 500 in one day, it is natural to feel some anxiety. Before you get too worked up, consider these four steps during a market downturn:

1. If you believe in your financial plan, do nothing

As long as your portfolio is structured to support your financial plan, don’t worry about it, do nothing. Your financial plan should provide you with the target you need to hit at a certain age – usually retirement age. That targeted dollar amount should be the amount of investment assets necessary to generate enough income for the rest of your life after social security and other possible income sources are considered. Your focus should be that target in that year, not your total next week.

2. Don’t panic and sell

People sometimes panic when the market jolts and they exacerbate the downturn by selling assets in response. Note this study: The S&P 500 made 9.85% per year from 1995 through 2014. If you sold your stock mutual funds and missed out on just the 10 best days during that period, that return drops to 6.1%. For example, if you began 1995 with $100,000, you would have $75,078 more at the end of 2014 by staying invested. So, don’t panic and move your money into cash.

3. Review your plan

If the volatility in the market makes you nervous, reassure yourself by checking your progress toward your goals. Look at your financial plan to make sure it is up to date, congratulate yourself on your progress so far and focus on your long-term goals. If circumstances have changed and your plan needs updating, recent events could be a good reminder to do that.

4. Manage risk by rebalancing your portfolio

Your financial plan should be supported by a portfolio that allocates a percentage to different asset classes – such as stock mutual funds, long-term income funds, international funds, possibly real estate funds – in a way that is appropriate for your individual circumstances. Reviewing your portfolio quarterly to ensure those asset classes are still allocated according to your plan is a good way to manage the risk of your portfolio and to stay on track.

If you are interested in learning more about investing for the long-term while managing volatility, resulting in a better retirement outcome, see a recent post on the importance of a diversified portfolio: Continue reading “Four Things To Do During A Stock Market Downturn”

What You Can Learn From Reviewing Your Financial Situation in 2017

Don’t read this blog post now – save it for the week between Christmas and New Year’s and read it then. Let’s face it, you’re running around like your hair is on fire trying to finish work projects, attend parties and finish your gift buying. But that week after Christmas is usually pretty slow. If you’re working, there aren’t a lot of phone calls. If you aren’t working, outside of a movie or maybe ice skating, there’s plenty of free time. Take one hour during that week and 1) Read this blog post; and 2) Review the following items:

Did you meet your short-term goals for the year?

We should always write down our goals for the year, right? Exercise more, read more for pleasure, etc. Because writing down a goal helps make it real and measurable. But, do we? Uhhh, did I save that cocktail napkin somewhere?

Whether we have our 2017 financial goals written down or not we probably still have a pretty good idea of what we intended to do. Did you want to establish a budget? Did you intend to save a certain amount of money for retirement for the year? Did you want to pay down student loans or maybe refinance your student loans? Did you shoot to establish an emergency fund to cover 3-6 months of living expenses should something interrupt your income?

Take just a few minutes and measure whether you accomplished those items you intended to – even if you didn’t write them down as a specific goal. If you hit the mark, raise a glass of eggnog for yourself. If not, choose one goal – the most important financial goal for 2018 – and write it on your computer somewhere where you won’t lose it. Make it measureable and achievable and, if possible, make it systematic where you don’t have to think about it each month.

How did your investments perform?

The stock market has been amazing this year. Not only is the S&P 500 up about 18%, there has been very little volatility – ups and downs of the market. In fact, this year has seen the lowest volatility since 1970. So, how did your investments perform?

Because the stock market has performed so well, this is a good time to look at your asset allocation: what percentage of your investments are in categories like Long Term Income, Growth, Real Estate and International? As stocks increase, including stock mutual funds, it’s easy for your portfolio to get too heavily weighted toward stock mutual funds, exposing you to unnecessary risk when the stock market declines at some point. One of my favorite quotes comes from the former boxer, Mike Tyson, who once said, “Everybody has a plan until they get hit in the mouth.” In our context, when you’re figuratively hit in the mouth when the stock market declines, do you have a plan? In other words, are you properly diversified so your portfolio includes funds that aren’t tied directly to the stock market and they hopefully zig when the market zags? In addition, is your portfolio structured for your personal time horizon and goals?

Did you follow your long-term plan?

Did you save as much for retirement as your long-term plan calls for? Is the total of your investment assets where you planned for them to be at your age? If you are behind, what is the cause?

A well thought-out financial plan should examine your current lifestyle/expenses and inflate them to a point in time when you would like to stop working. Age 55? Age 65? Then, how much in investment assets are required in order to produce annual income sufficient to cover those expenses for the rest of your life? Then, your plan should have concrete steps and measurable goals along the way to eat that elephant one bite at a time.

Merry Christmas, Happy Hanukkah and Happy New Year! Thank you for reading my blog – you can subscribe at the bottom of this post and have it delivered via email each week – and look for it again on Friday, January 5.