It’s possible that history’s longest running bull market may soon see a correction. Some of my clients are beginning to ask what they should be doing differently with their investments in light of this possibility.
First, let me remind you that “correction” is not a four-letter word. I don’t blame you for thinking it is after so many years of positive market returns, but, honestly, the up-and-down nature of the capital markets is a natural phenomenon. The market can’t go up forever; sometimes it must go through a reset, and that’s healthy!
When you make a commitment to invest in stocks, bonds, mutual funds and ETFs you are taking on some element of risk. That’s why financial advisors ask you about your “risk tolerance” when establishing an investment account.
If you came to me and told me you had no tolerance for risk, I would suggest that you save for retirement via savings accounts and CDs. You won’t get the growth the stock market has historically delivered, but you will be taking on little to no risk. That works for some people.
But those who want to make money from their money by investing are going to have to accept some amount of risk. An advisor can help you determine how much you can handle and still sleep at night. Then you can invest in securities that match your risk tolerance.
Now you see how investing is different from “saving.” As an investor, market corrections will impact your portfolio from time to time. The good news is that your portfolio can be protected against some amount of loss if you regularly employ “rebalancing.”
Investopedia does a good job of explaining this concept:
“Rebalancing involves periodically buying or selling assets in a portfolio to maintain an original desired level of asset allocation.
For example, say an original target asset allocation was 50% stocks and 50% bonds. If the stocks performed well during the period, it could have increased the stock weighting of the portfolio to 70%. The investor may then decide to sell some stocks and buy bonds to get the portfolio back to the original target allocation of 50/50.”
Have you rebalanced in the past six months? If not, now is the time. In my financial advice practice, we rebalance client portfolios, if needed, every six months. This is how we strive to help our clients’ investments even during market downturns. We also suggest that clients keep three–six months of living expenses in cash, another aspect of total rebalancing.
Then, once a recession hits, it’s important to avoid selling equities that have fallen in value due to panic you may be feeling at the moment.
We know from a behavioral finance standpoint that fear can cause us to act irrationally. My role as an advisor is to help protect you from emotional reactions (like selling stocks at a loss) that could potentially have a negative effect on reaching your retirement goals. By selling stocks when they are down, you are locking in your losses.
Stock performance is all about time—the length of time you have to put money in before you need to take money out. If your portfolio is set up to match your risk tolerance, then your advisor will have taken your time horizon into account.
Whether or not you expect a market downturn, you will always want to ensure the appropriate balance between equities and fixed income in your portfolio.
Need some assistance with rebalancing? Just give us a shout!