Wouldn’t it be nice if we could count on the market to continue its upward trend for the foreseeable future? I know it would certainly make my job as an advice-based planner a lot easier (and more fun!). However, as I previously talked about in my blog on lifeboat drills, the market historically goes through a ‘correction’ about every five years and we are overdue for one of these occurrences.
What is a ‘correction’, exactly? A correction is defined as a downward movement or decline in the market index of at least ten percent (though true corrections usually exceed that amount). Corrections are rarely permanent and usually last around three to four months. The bad news is, they can be extremely upsetting (especially to emotional investors). The good news? If you know the proper ways to prepare for them and ride them out, they rarely have much of an impact on your overall financial goals.
How to Prepare
Fortunately, there is plenty you can do to prepare for the next market correction. However, most of that ‘preparation’ will look a lot like something else: doing nothing. However, there’s a big difference between the two, as you’ll see.
Don’t Panic The most important thing you can do when thinking about a market correction is to keep your emotions in check and don’t panic. You are not going to lose everything. If your portfolio is properly balanced, you will be able to ride out the correction with little if any negative effects. One of the best ways you can achieve this first step is to stop watching the financial news. The goal of financial news is not to inform you or help you make good decisions. The goal is to drive ratings through inciting fear, and the only thing you will accomplish by watching these programs is to increase your anxiety and your chances of making an emotional mistake.
Be Patient Every time we have experienced a sizeable correction, markets have recovered in full after a period of time. Will the market recover overnight? Of course not. It will likely take some time. However, it’s important to wait it out without making hasty decisions (and without checking your stocks every day to see how they’ve rebounded). This is a great time to shift your focus to other matters such as learning or wellness and keep your mind off the market.
Don’t Make Emotional Decisions When a market correction is looming, the only really good decision you can make is no decision at all. There’s no reason to sell anything. There’s no reason to shift anything around. If your advisor has done his or her job, you’re already properly prepared to withstand the correction. Though it may be tempting to try and time the market and make some more money or sell off a stock when you see it tanking—resist the urge. These are emotional decisions that will not serve you in the long run.
Listen to Your Advisor Your advisor’s job to make sure your portfolio is strong and that it can thrive over the long haul. If you’ve chosen an advisor who has really gotten to know you, challenges you, and listens to all your concerns, have faith that he or she has your back and will let you know if any changes need to be made.
A market correction is no cause for panic and it should never be a reason for making huge, sweeping changes to your portfolio. Simply follow the above advice, believe in your advisor, and wait for the inevitable recovery. If you have more questions about a market correction, please reach out.
Patrick Tucker, the owner of True Measure Wealth Management, has over 20 years experience in the industry and has spent the last 15 years learning the ins and outs of the fee-only advisory business. He focuses on client behaviors and what ‘wealth’ means for each individual client to provide caregiving plans that lead to a mindful fulfillment of financial goals. A lifelong learner, Patrick uses his continued knowledge to become a valued partner for his clients and help them explore the wisdom of true wealth.