4 Steps to Prepare for Stock Market Volatility
Market corrections are never easy to go through, even when they are expected. However, certain elements can help us through downturns, with the most crucial being a solid understanding of why we invest and have a wealth management plan. Planning and understanding can help bring peace of mind when facing uncertain times financially during stock market turbulence.
Below are a few key aspects that you should consider when going through a market correction:
Understand Risk Is Part of Investing
Know that you will have an emotional response in the face of losses. But rather than react, trust that you have constructed a wealth management plan that will be resilient in timeframes longer than a day, week, month, or quarter.
If you find yourself ready to jettison assets after a week, quarter, or even a year of disappointing performance, go back to your wealth management plan and revisit why you are investing. Recall the conversation about risk discussed beforehand, knowing this was a potential scenario and how it should be handled.
Don't Immediately Sell When Things Go Bad
A portfolio is a collection of assets assembled to achieve certain objectives, almost certainly not measured over days or weeks. As David Swensen, former chief investment officer of Yale University's endowment fund, has said, "Casual commitments invite casual reversals." Investors must acknowledge that the dips in the stock market may be painful at that moment but are to be expected.
If your initial reaction is to sell when a strategy produces a negative return, I suggest rethinking your current strategy.
Don't Review Losses Daily
When looking at a portfolio daily during times of stress, investors are almost guaranteed to be disappointed. On any given day, week, or month, uncorrelated strategies or assets over longer periods can behave similarly to overall market movements. If the risk has increased, the moves will be larger.
There is a time horizon component to your investment strategy. A conversation should address the possibility of minor and major market shifts ahead of time, allowing for more level-headed thinking during market turmoil.
Don't Be Your Own Worst Enemy
While emotions can work to our benefit, they can also work to our detriment, especially when handling our financial lives. At times we may become so consumed with our fears and emotions that we don't know how to hit the stop button to reset and begin anew with a different perspective.
Working with an advisor who knows and understands you and your plans can help you from being your own worst enemy. If you are building a portfolio for the long haul (greater than five years), getting too focused on daily, monthly, and quarterly movements can only undermine the hard work you have already done.
A market correction is never a simple process. But if you remember that risk is part of investing, don't immediately sell when there is poor performance, and don't review your losses frequently, you will retain peace of mind through the market correction without the stress these bad habits can cause.