The late great Tom Petty said it perfectly when he said, “the waiting is the hardest part.”
With how well the market has performed since bottoming out in 2009 (the S&P 500 is up 279% as of September 30, 2017)* it seems like we are waiting for the market to drop. The challenging part is the unpredictability of when the market will experience a correction. The average intra-year drop for the S&P 500 since 1980 is 14.1%, yet annual returns have been positive in 28 of the last 37 years.*
How to Prepare for Unknown Market Changes
The question we are all grappling with is what we should do when it comes to unpredictable market changes. At times, it feels like we are the yodeling man about to go over the edge on the Price is Right “Cliff Hangers” game. How can we avoid the emotions and worry that lead us to make bad decisions?
The best way to avoid emotional decisions is by having a plan. The key is to stay the course. The best preparation for a potential market correction is to work with your financial advisor to understand your asset allocation. By knowing what can potentially happen to the value of your portfolio during a market correction, you stand a much better chance of sticking with your plan.
- When you know what could happen, it won’t be as surprising when it does.
- By avoiding surprises, you reduce the impulse to make emotional decisions.
- By viewing your plan rationally, you are more likely to stick with it.
Why is it Important to Stick with Your Financial Plan if the Market Drops?
It’s important to resist the urge to make changes when the market is volatile. Many people made changes to their investments in 2008 and haven’t recovered. Those who stuck with their plan made out much better.
- By sticking with your plan, your chances of meeting your long-term return targets increase.
- Your plan should be prepared for changes in market returns, but it won’t be prepared for changes in your asset allocation.
- Making changes in a down market can cause you to miss some of the best days of market growth.
We don’t know if a correction is coming tomorrow or years down the road. In my experience, the people who are successful are the ones who understand what to expect from their portfolio before it happens. By knowing what to expect in terms of gains and losses, you are much more likely to stick to your plan and not become emotional during a market downturn.
As Warren Buffett said, “It’s not the timing of the market, it’s time in the market.” The secret to keeping yourself properly invested is making sure your asset allocation is in line with your tolerance for risk. By understanding the potential loss in your portfolio, you can begin to prepare mentally for the next correction.
When was the last time you thought about how much risk was in your portfolio? If you haven’t thought about your investment risk tolerance since you set up your account, chances are things have changed. We recommend reviewing your asset allocation and risk tolerance at least annually.
Are you looking for someone to review your asset allocation and risk tolerance? Contact us to set up an appointment to review your current portfolio. Not quite ready for a review? Be sure to follow us on Facebook and sign up for our Connecting Money to Life Newsletter for more information.
*Source: J.P. Morgan Asset Management