How to Stay Afloat in a Down Market

Bear markets are nobody’s favorite time of the season. While significant market downturns can cause distress, you may find comfort in knowing that a little patience and a whole lot of planning could go a long way toward your overall retirement success.

When financial markets are disrupted, it may make us fearful for our financial well-being. This is why at NJM Wealth Preservation Strategies, we often hear the question, “What can I do to retire confidently during market uncertainty?”

The stock market moves in cycles, so if you’re a long term investor, it is likely you’ll experience downturns along with upturns. While it’s natural to panic, it’s important not to. There are a number of ways to stay afloat during a downmarket. The best way to be prepared is to have a financial plan in place & a financial professional in your corner. 

What Defines a Down Market?

A market downturn occurs when the stock market turns from rising prices to dropping prices. Downturns can happen quickly and unpredictably, but the market can also correct itself just as fast. Although, if the downturn does not bounce back, it can develop into a bear market. This can cause a sustained period of price declines which could indicate a recession is to follow. 

What Causes the Market to Drop?

A decline in demand for stocks causes the prices to fall, but there can be a number of favors behind the decrease in demand for stocks. One of the most common is when consumer spending falls. This could be due to lack of confidence in the economy or personal situations. 

Another common reason is when the housing market slows or grows erratically. Housing prices can be a good predictor of market downturns. Stable and increasing housing prices tend to indicate the stock market is also doing well. Alternatively, if prices are increasing unreasonably and out of touch with their actual value, this could be a sign of a downturn. 

Additional reasons include yield curves on bond drops, manufacturing declines or public companies profit margins sinking. An actual market downturn usually involves multiple of these factors at play simultaneously. It’s rare for just one factor to influence demand enough to lead to a downturn.

What to Do to Stay Afloat During a Down Market

  1. Avoid Knee-Jerk Reactions and Focus on the Long-Term: A caveat to note here is the following: A.) If you have 10 plus years to recover. B.)The market sell off is less than -15%.

When the market drops, it can be tempting to change your investment strategy immediately. Selling when the market is at a downturn actually puts you at risk of permanent capital losses. It can be difficult to sit back and watch your portfolio’s value shrink, but if you’re investing for the long term, doing nothing is often the best course. This can actually be a growth opportunity once the market upturns. Reentering when the market is high can be expensive and you won’t be getting any of the gains from the rebound. 

  1. Understand What’s At Stake With Your Risk Tolerance 

It’s extremely important to understand your risk tolerance prior to setting up your portfolio, not just when the market is down. Your risk tolerance depends on a few different factors, such as your investment time, cash requirements, the proportion of stocks in your portfolio along with your monetary & personal goals. Typically, the greater the proportion of stocks in your portfolio, the higher the risk because you’re less diversified through other assets that experience less volatility. Looking at your investment timeline is also telling. For example, someone in or near retirement should likely want to preserve savings, meaning their risk tolerance is lower. Alternatively, younger investors that are aiming for long-term growth have more time to make up for losses giving them a higher risk tolerance. 

  1. Prepare for/Limit Your Losses

The key to reducing your risk and limiting losses is true professional diversification. Investing in longer-term, high-quality options can help limit the effects of a market downturn on your portfolio. Every investor’s situation is different, so how you spread your portfolio should directly reflect your own personal risk tolerance, timeline, health, goals, along with many other factors that can be evaluated & incorporated into a plan deserving of the retirement you have worked so hard to enjoy. If this appeals to you, reach out to experience the difference a truly actively managed portfolio can make.

  1. Find Opportunity

A market downturn can also present investment opportunities. For example, defensive stocks (healthcare, utilities, consumer staples or companies with high-quality businesses and balance sheets) or high-quality stocks that pay dividends could potentially help boost total returns when stock prices are falling. Additionally, consider continuing to regularly invest in your chosen investments. You’ll be able to buy more with the same amount as you did prior. The goal is always to be able to participate in the rebound when the market is down. 

Final Thoughts

Working with a trusted financial advisor ensures you’re making the most strategic decisions. It is not necessary to pay someone to manage your emotions while they neglect your financial plans. 

If you’re looking for a professional retirement income specialist, NJM Wealth Preservation Strategies can help. If you’re ready to get the most out of your investments to ensure the health & longevity of your retirement portfolio, schedule a call with us today.