Unless you’ve been blissfully living off the grid since the start of this year, you know that that stock market has been tumbling. Through the end of May, the S&P 500 had lost more than 13%. The tech-heavy NASDAQ was down even more—much more. What’s an investor to do? Here’s a five-point survival guide for down markets.
1 – Know some market history
The stock market moves in cycles. Bull markets are followed by bear markets, just as surely as bear markets are followed by bull markets. And on it goes. Through the long sweep of stock market history, its general trajectory has been upward. But it hasn’t moved in a straight line. There have been lots of ups and downs along the way. On average, the stock market had declined by 10% once every other year, 30% every four to five years, and 50% once per generation.
Downturns come with the territory of investing. A down market, such as the one we’ve been in this year, is no reason for surprise or worry. It’s a normal part of how the market works. Expecting some down markets every now and then can help take the edge off.
2 – Know yourself
It’s a well-documented psychological phenomenon that we human beings are hard-wired to feel the pain of loss much more acutely than the pleasure of an equal gain. Losing feels bad, really bad. So, if it hurts to see the value of your portfolio declining, remind yourself that that’s normal.
One antidote for times like this is to not look at your portfolio very often. Research has demonstrated that the more often people look at their portfolio, the more often they trade, usually to their detriment. Especially when the market is falling, watching your portfolio balance decline will only make you feel worse. And it might tempt you to do something. Letting our emotions drive our investment decisions usually turns out poorly. Remind yourself that at times of market stress, the most difficult part of investing, and usually the most beneficial, is to do nothing at all.
3 – Know your plan
When it comes to investing, there’s a lot of “noise” out there. Headlines telling you about the next can’t-miss stock. Co-workers talking about their investment ideas. Far better to tune out that noise and instead put down on paper (or pixels) an investment plan that describes:
- Your investment goals. For example, you could state when you plan to retire and how much of a nest egg you’re aiming to have by then.
- How much you’re investing each month. Based on a reasonable return on investment assumption, use an online calculator to determine how much you need to invest each month.
- What account(s) you’re using to pursue your goals. IRA? 401(k)?
- Your optimal asset allocation.
This requires knowing your investing temperament and time frame, which will help you identify the right mix of aggressive and conservative investments for you.
4 – How you’re investing?
How are you selecting your specific mutual funds or other investments? Are you simply using a target-date fund, or are you doing something more involved? Are you making decisions on your own, or are you getting help, perhaps through an investment advisor, a so-called robo-advisor, or an investment newsletter? Whichever method you use, make sure it’s process-driven—rules-based, and objective, rather than opinion-based or subjective.
5 – What you will do in times of market stress?
If you have chosen an investment strategy that is intentionally tailored to your age, investing temperament, and goals, you should be willing to stay with it in good times and bad. But it helps to write it down like this: “No matter what happens in the market, I am confident about the strategy I have selected and am committed to staying with it come what may.” When the market gets a bit wobbly, re-read that statement.
No investor likes market downturns, but they come with the territory. Taking the three steps above should help you navigate this year’s volatile market with your portfolio—and your sanity— intact.
Matt Bell is the author of four Biblical money management books published by NavPress. He speaks at churches and conferences throughout the country and writes the MattAboutMoney blog.
This article should not be considered legal, tax, or financial advice. You may wish to consult a tax or financial advisor about your individual financial situation.