How to Prepare for Market Volatility
You notice over your morning coffee a stern warning emanating from your television as the very serious business reporter notes the Dow opening down one percent. What do you do? If you screamed, “Sell!” or “Panic!” perhaps you should take the advice of some of the world’s savviest investors and turn away from the stock ticker for the rest of the day. You may be envisioning dollar signs flying out of your wallet and you want to get on the phone and sell. You may even see an opportunity to buy. However, most market gurus will say that if you have a wise strategy in place, it’s typically best to stay the course.
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 a little bit … 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
Having a balanced portfolio can help to balance risk and return. Generally speaking, balanced portfolios consist of a 50/50 mixture of stocks and bonds. You can re-balance by selling other assets like bonds or even commodities. Then you can invest in stocks that are down in price. It’s not a panic buy; it’s a strategic move that fits your original investment plan by taking your portfolio back to the ratio of stocks to other assets.
2. Resist Panic Selling
Typically panic selling is triggered by events that may lower the confidence level of investors causing them to sell and when this occurs on such a wide scale sharp declines in pricing tend to occur. Selling in a rush to get out of a down market could have long-term implications and often times cause you to miss out on some big gains when the market corrects.
3. Consider Taking Advantage of Tax Laws
Many financial advisors suggest a strategy to create tax losses to offset capital gains by selling an investment. If your gains are less than your losses, you can claim those losses on your tax return. You can carry over losses greater than the amount you can claim on your annual return to another tax year. This strategy is referred to as tax-loss harvesting.
4. 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 your debt. If you start losing money in the market that threatens to deplete your funds, you don’t want to have to pay creditors while trying to take care of yourself and maintain your accounts.
- Ask your financial advisor about reducing the amount of risk you have. You’ll at least feel more confident about your portfolio if you know that you’ll have a healthy portfolio that is less affected by market fluctuations.
- Don’t invest money you think you may need. This is especially important for retirees who may only have investment income to rely on as they get older.
5. Focus Long-Term
When you start to see headlines of the stock market declining it can be easy to go into panic mode and wait to watch values decline in real-time. However, when you sell investments in a downturn your essentially locking in your losses. When the market eventually stabilizes you’ll likely be left chasing much higher prices. It’s always a good idea to keep your long-term goals in mind before making any decisions in a downturn and consulting with an experienced financial advisor before making any moves.
Buffet advised taking a look at the earnings sheet to determine whether you have made a good investment, not the market. You can’t judge your investment strategy all of a sudden; you have to look long-term.