Don’t Let the Markets Get You Down
4 Steps to Keep You from Panicking During a Market Downturn
Investors over the past 6 years have largely been able to invest aggressively with few consequences. (assuming they’ve been able to put behind them the tumultuous market correction of late 2008 and early 2009).
The market events of last week starting in China that has spread globally as well as today’s 1,000 point drop in the Dow Jones Industrial Average at the market open, will hopefully make investors re-examine what they’re doing.
I don’t believe in market-timing or pulling out of the stock market completely. What I try to get my clients to think about is their risk appetite and their “sleep at night factor”. Identifying a portfolio that allows them to stay in the market, while also working to meet their long-term needs is the goal.
Contrary to many financial advisors, Chessie Advisors believes that your investments should be driven by your financial plan instead of having your investments drive your financial plan.
Below are four steps to keep you from panicking during market downturns:
Step 1: Put together a financial plan
What is my American Dream? When do I want to retire? Can I afford to send my kids to college? These questions and many more can be analyzed if you take the time to develop a financial plan. You can do this on your own or hire an advisor to help.
If you’re not comfortable doing it on your own, you’d rather spend what little time you have outside of work with those you love, or doing things you enjoy doing, find a professional to help. Look for a fee-only financial advisor, the way Chessie Advisors operates. Fee-only advisors are paid only by you, the client, and not by a third-party, like an insurance company or mutual fund company (Brokers or fee-based advisors can sell you insurance or other investment products and be paid by their employer or by the company of the product they’re recommending).
There are many fee-only advisors who will work with you without managing your investments. Identifying your dreams and goals and laying out a strategy to achieve them will help you stay focused when market events occur like what we’ve seen over the past week.
Step 2: Develop an investment strategy
Once you’ve identified what types of investment returns are needed to realize your goals, you can work on putting together an asset allocation that will not only give you the ability of achieving your goals, but also allow you to stay invested for the long-term, and not quit, when the markets bounce up and down.
Just because someone is young, doesn’t mean they should allocate 100% of their investments to stocks, nor should an older investor drawing money from their portfolio in retirement allocate 100% of their investments to bonds. “Rules of Thumb” are not always the best guides.
If you choose to hire an advisor, make sure they are following a “fiduciary” standard of care and only recommending investments that in your best interest (what a fee-only advisor does), not just something they get most compensated by or just investments in their company’s products (like a broker or insurance agent may recommend).
If you choose to do this step on your own, make sure you create a portfolio you can stick with and find someone you can discuss your portfolio with. In big market declines, it’s easy to second-guess your investments and having someone to act as a sounding board is priceless.
Step 3: Revisit your strategy over time
Picking one investment strategy and sticking with it for 30 years is probably not the best strategy. Goals change, your risk appetite may change, and your financial situation may change. Don’t get sucked into allowing your portfolio to get overly aggressive because the market does well (see Step 4 below). Chances are good that you’ll also bail when you see a downturn.
I remember vividly the conversations I had with clients in late 2008 and early 2009, specifically one client on March 6, 2009, three days before the market bottom. We had multiple conversations with the client over that time period, and the client had shifted their asset allocation a few times, out of fear, not because their goals had changed. Emotionally, they couldn’t take the losses any longer and they decided on that day, to cash out of all their investments and stop management of the account.
I have no idea when, or if they got back in the market. My guess is that they were so severely shaken from their stock market losses, that it took a year or more to invest and that they’re a much more conservative investor today because of it. They should never have been as aggressive as they were entering the market decline, but the rising stock markets through the middle of the 2000s allowed them to drift outside their comfort zone.
Step 4: Rebalance (or at least review) your portfolio at set intervals
If you have a set plan to review and rebalance your portfolio, you’re setting yourself up to “buy low, and sell high”. It’s not always easy to rebalance, that’s why you need to set some guidelines of when to revisit your allocation. Monthly, quarterly, yearly. Whatever the interval you decide on, stick with it.
When stocks are doing well, sell some to re-allocate to bonds. When stocks fall, sell some bonds to buy stocks.
If you haven’t already, let the market movements of the past week prompt you to take another look at your portfolio, your allocation, and your long-term goals to make sure they are still aligned. If you need help and don’t know where to turn, reach out to a fee-only financial advisor to at least have a conversation about your situation. Sometimes the best answer is just a phone call away.
About Chessie Advisors
Erik O. Klumpp, CFP®, EA, founder of Chessie Advisors, LLC and Chessie Tax, LLC, believes that teachers, engineers, and young professionals should have access to objective, fee-only financial planning and investment management to help them create and realize their American Dream. For more information on the services offered through Chessie Advisors, check out our website, contact Erik, or schedule an introductory call