Whenever the stock market takes a negative turn, investors begin to wonder if the worst is yet to come. But panic-fueled selling in reaction to a down market can erase years of solid investment performance. Worse, it can ultimately decrease an investor’s ability to meet long-term life goals and undermine their overall financial health.
There is a better way. When it appears a recession is looming, or perhaps is already upon us, investors should take a deep breath and then make level-headed decisions on the best course of action. It is recommended that you don’t act hastily based on what you’re reading in the media about the economy.
The following four suggestions are designed to help people prepare in advance so they can resist making ill-advised, heat-of-the-moment choices about their assets when the next bear market hits – as history suggests it inevitably will.
Know the history and the context. The stock market is prone to long and sometimes extreme highs and lows. But drops in the value of assets are on paper only and not true losses; they only become true losses when those assets are actually sold. Having a broad historical perspective helps investors resist selling assets when their value has plummeted, which is hardly an optimal move.
Ensure that your assets are appropriately allocated. Your money should be strategically allocated across asset classes, such as stocks and bonds, so your assets provide both the potential for growth and protection in a bear market.
It’s also important to maintain a cash reserve or emergency fund, from which you can draw money should you lose your job, instead of having to resort to liquidating stocks or tapping retirement accounts when their value is down.
Have a genuine big-picture financial plan that includes goals, and revisit the plan to remind yourself of those goals. Your long-term financial plan should connect your resources to your goals, and specify the asset-management strategies and steps needed to reach those goals, taking into account bear markets, bull markets and everything in between.
Get help from a financial professional to guide you through possible scenarios. People who have walked through the what-ifs ahead of time, with hypotheticals to see how their particular asset allocation has performed in past bear markets, are less inclined to make imprudent asset-management decisions when a negative scenario becomes reality.
To be worthwhile and accurate, these market scenarios need to account for a wide range of factors. That’s where modeling tools, and a financial professional who knows how to use them, become particularly valuable. Not only can a financial professional run various scenarios on complex modeling software, but they can interpret the findings and relate them to your specific situation.
To find a Certified Financial Planner in your area, go to the Financial Planning Association’s searchable database, at www.PlannerSearch.org.
JASON E. SIPERSTEIN, CFA, CFP, is the president-elect of the Financial Planning Association of Rhode Island and president of Eliot Rose Wealth Management. He can be reached at firstname.lastname@example.org.