Negative market conditions can put our near-term financial goals in jeopardy and can, therefore, make us feel like we have to do something. However, doing something drastic – especially during times of heightened emotional stress related to job security or personal safety – can have negative long-term financial consequences.
Rather than trying to time the market, here are some other small things we can do during this time to make sure we stay on track with our near- and long-term financial goals.
REVIEW YOUR CASH PLAN
Most advisors urge clients to keep some level of liquidity to protect them from the unpredictability of life, with many suggesting having enough cash on hand to meet 3 – 6 months of living expenses. If you feel like you are short on cash reserves, now is the time to beef up your cash cushion. Having appropriate cash reserves should alleviate the need for you to sell investments during an inopportune time.
REBALANCE TO TARGETS
When markets dramatically increase or decrease, chances are your investment allocation targets become skewed. During good times and bad, it is important to make sure to rebalance your portfolio periodically to get back in line with your investment objectives and financial plan. This is also the simplest way to ensure that you are always selling high while the market is up and buying low when the market is down.
CONTINUE YOUR RETIREMENT CONTRIBUTIONS
While it may seem counterintuitive to do so, continuing to buy during a market downturn can be overwhelmingly helpful toward meeting your long term financial goals. In essence, the market is on sale. Your contributions during a downturn buy significantly more than when markets are higher. View this as an opportunity. However, I do have to offer one important caveat to this recommendation. If you feel that your cash position is light or that your income could be at risk during a downturn, it may be best to pause your investment contributions until you have saved enough cash to be comfortable or until the risk of lost income subsides.
WRITE DOWN YOUR FEELINGS
I know, I know…feelings? Bear with me on this one. I want you to write down what you are feeling about the current downturn as it relates to your finances. Are you feeling stressed because you feel that your investment allocation was too aggressive? Do you wish you had more cash/liquidity? Or are you feeling opportunistic and seeing this as a buying opportunity?* Take these notes with you the next time you meet with your financial planner so the appropriate adjustments can be made to your plan going forward. It has been over a decade since the last recession, so what felt okay the last time around may no longer work for your current financial picture.
DON’T OBSESS OVER YOUR ACCOUNT STATEMENTS
Looking at your account statements everyday won’t help you. Review your statement quarterly, at most, in good times and in bad. Investments go up and they go down. What matters is your financial plan and whether you’re doing what is required to meet your long-term financial goals.
STICK TO YOUR PLAN
General George S. Patton once said that “a good plan today is better than a perfect plan tomorrow.” Successful investors create a financial plan and then stick to it, in good times and in bad. A significant market selloff should be one of the many scenarios contemplated by your financial plan. Continue to review your plan and keep your eyes fixed on the long term.
Market conditions like those we’ve experienced the last several weeks can challenge even our most fundamental views on investing. During times like this it’s important that we remember we’ve been through difficult market conditions before, and we will experience challenging times again in the future. Adhering to time-honored principles of good financial planning coupled with a buy-and-hold investment strategy can help us weather any market condition – good or bad. If we can help you during this time, please do not hesitate to contact us.
* According to individual investor research conducted by the Spectrem
Any comments, insights or strategies discussed in this article are intended to be general in nature and, therefore, may not be suitable for you and your situation, whatever that may be. Before acting on anything written here, please consult with your attorney, CPA and/or your financial adviser.