Reed Terry, Financial Advisor, Edward Jones on E. Spring St.
As an investor, you constantly want to see your portfolio move just one way—up. But that’s not possible, because the financial markets will always fluctuate. So, if you’re going to invest for many decades, you need to be prepared for many ups and downs. Still, the recent market pullback from record highs,
caused largely by the coronavirus, may have you particularly concerned. How can you navigate this environment?
Here are five suggestions:
Avoid the temptation to panic. This pullback, while unsettling and unprecedented because of its speed, won’t last forever. And when it ends, you’ll still want to be invested in the financial markets, because the biggest gains usually occur in the earliest stages of a market rally. Of course, there are no guarantees in
the investment world, but we’ve seen many examples of this pullback/rebound pattern throughout history.
Measure your progress against your goals. In the midst of a market downturn, it’s tempting to look back longingly at the peak value of your portfolio, and that’s especially true these ndays, when that high point may well have been just a couple of months ago. But this isn’t a good “measuring stick” of your financial situation. Instead, consider the overall progress you’ve made toward your long-term goals since you first started investing. If you’ve been at it for quite some time—at least a decade— you’ll probably see that you’ve actually come a long way, despite what’s happened lately. So if your goals haven’t changed,
your strategy to achieve them shouldn’t either.
Put time on your side. If you are investing for goals that may be two or three decades away, you have the advantage of time to overcome market downturns, even severe ones. After all, you weren’t going to be cashing in long-term investments now, anyway. That’s not to say this pullback is irrelevant, of course—it
may indeed slow your progress toward your goals, but it still shouldn’t stop you from achieving them.
Here’s another point:
If you need money from your portfolio for short-term goals, such as a wedding or a long vacation, you should keep those funds in investments that offer greater protection of principal—such as high-quality bonds and government securities—and are far less susceptible to fluctuating financial markets.
Benefit from diversification. The headlines show how much the major stock market indexes, such as the Dow Jones Industrial Average, have fallen. But if you’ve built a diversified portfolio, containing a mix of stocks, bonds and other investments, your own results, while not great, are probably much better.
Although diversification can’t always prevent losses or guarantee profits it can help reduce the impact of volatility on your holdings and smooth out returns. Go “against the crowd.” When prices are falling, it’s not hard to join the crowd and start selling, in an attempt to “cut losses.” But cutting losses really means locking them in. Right now, prices of quality investments are lower than they’ve been in years, which can make for compelling buying opportunities for those investors willing to go against the crowd.
Even by following these moves, you can’t eliminate all the effects of the market drop—but you may be able to create a softer
landing for yourself.