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What to Do When the Market Tanks

You notice over your morning coffee a stern warning emanating from your television as the very serious business reporter notes that the Dow is now down 10 percent from it’s recent high. He or she is using words like “free fall”, “meltdown”, “crash”, “selloff”.  

Why do they use these words? Things might be perceived differently if the  commentator instead had said: “The stock market is down more than 10% from it’s highs today, which is extremely common and happens on average about once a year over the stock market's history. Some years have more than one and some years have none, but corrections are part of owning stocks.  And, when they do happen, they do not last very long before stocks recover, about 14 weeks on average."  A great many viewers might change channels and the advertisers would not be willing to pay as much to put their commercials on that show.  

What does your mind do when they hear these fear words? If it screamed, “Go to cash now!!” or “Don’t put any new money in the stock market. You will lose it!” perhaps you should take the advice of some of the world’s savviest investors and turn away from the cable financial shows for the rest of the day (or longer).  

Billionaire and real estate magnate Warren Buffet told CNBC in 2016 that buying or selling in a rush may not be the best strategy. “If [worried investors are] trying to buy and sell stocks, and worry when they go down … and think they should maybe sell them when they go up, they're not going to have very good results." Such a panic move could unbalance your portfolio where you are either taking on more or less risk than you should.

1. Keep a Balanced Portfolio

You’ve likely heard the phrase, don’t put all your eggs in one basket”. A balanced portfolio is a must for surviving a stock market crash. Most investors should not have 100% of their investments in stocks. You should also have a portion in bonds, cash, and perhaps real estate. When one part of the portfolio is down, another might be up or flat. When you rebalance, you are selling assets that are up and buying into other assets when they are on sale. You have probably heard anther phrase describing how to make money in the market: “buy low, sell high, repeat until wealthy”. Rebalancing does exactly this. It’s not a panic sell or buy; it’s a pre-planned move to keep your portfolio in  the target ratio of stocks, bond, cash and other assets.

2. Resist Panic Selling

If you sell in a rush to get out of a down market, you could end up missing some big gains when it recovers. A precious few bullish days in the market can account for the majority of your long-term market return. You will miss those few days if you are out of the market when they happen. That could make a monumental difference in retirement. JP Morgan reports that if you were out of the market for just 10 of the 7301 days between January 4,1999 and December 31st, 2018, your return went from 5.62% per year to 2.01% year. What if you sat out the best 60 days? You would have a 7.4% LOSS per year on your investments.  

Putnam Investments found similar results by studying the data from 2003 to 2018. If you were fully invested in the S&P 500, your annualized total return was 7.7% during that time. But if you missed only the 10 best days in the market, it dropped to a paltry 2.65%.


3. Protect Your Nest Egg

If you’re really worried about things like a college or retirement fund during a downturn in the market there are a few steps you can take to protect these funds.

  •  Reduce or eliminate your debt. If you find yourself in a declining market you don’t want to have to pay creditors from your savings. This is especially true in retirement, where if you don’t have mortgage or other debt payments to make, you won’t be forced to pull as much from your accounts in down markets.  
  • Minimize your fees.  Know exactly how much of your money you are paying in fees within your investments. Consult the prospectus or do an internet search of “[name or ticker of your investment} and fees”. Fees can be difficult to find in some cases, such as for annuities. But the data is available with some digging. If you have an advisor, you can ask him or her to conduct this study for you. Speaking of advisors, nobody works for free, so it is important to understand what you are paying there too, be it commissions, a percentage of your investments or an hourly or monthly rate.    
  •  If you are losing sleep over your investments, consider reducing the amount of risk you have. Don’t put all your money in cash, but you may feel more confident and relaxed about your portfolio if you know that you’ll have an allocation that’s less exposed to fluctuations.
  •  Don’t invest money into the stock market that you think you may need in the next five years. If you are still working this is money you may need for a car, college tuition, or a home downpayment.  If you are retired, this is any additional money you need for basic living expenses after your other income (social security, pensions, interest and dividends) is accounted for. This money should be invested in cash or fixed income (bond) funds.  

4. Focus on the  Long-Term

When you start to see headlines of the stock market declining it can be easy to go into panic mode and decide to sell to avoid more pain.  However, when you sell investments in a downturn you are locking in your losses. When the market eventually stabilizes you'll likely be left buying back at higher prices or being reluctant to jump back in until prices come back down to where you sold. It's always a good idea to keep your long-term goals in mind before making any decisions in a downturn.  With education and motivation, these are strategies a great many investors can do themselves. For those who do not have the desire, confidence or time to do so, the best protection may be to consult an experienced financial advisor before making any investment moves.