Long-term investors will experience a number of market downturns over the course of their lives, which can be triggered by everything from natural disasters to political turmoil. So, if you’re investing for retirement or another long-term financial goal, you need to know how to weather a market correction without being thrown off track.
Assess what type of downturn we are experiencing
You may hear a variety of terms used to describe market downturns. A drop in average stock prices of at least 5% and less than 10% is known as a “pullback” or “dip”; a drop of at least 10% and less than 20% is called a “correction”, and a drop of 20% or more is called a “crash.” Once prices return to the most recent high, the market is said to have “recovered.”
On average, crashes take longer to recover from than corrections do. Investors can’t know for certain that a correction isn’t a crash until it’s over. For example, if stock prices drop by 14%, the trend could reverse course from there and return the market to its previous peak. On the other hand, prices could continue to fall, eventually dropping by 20%, resulting in a crash.
How should you invest during a downturn?
The stock markets are notoriously difficult to predict, which is why market timing is generally a bad idea. For example, it might sound great to pull your money out at the top and to redeploy it at the bottom, but when will those events occur?
Historically, the best thing to do during a downturn has been to sit tight and ride it out. That’s because, historically, corrections have always been followed by recoveries. And you can only benefit from the recovery if you hold on to your investments.
We recognize that keeping cool is easier said than done. At times, it can be helpful to tune out the endless market coverage, which can fuel anxiety and lead to poor decisions. Market downturns represent a great time to speak with your financial advisor. They can offer a third-party perspective, put things into historical perspective, and make certain your actions are aligned with your goals.
If seeing your assets go into the red is truly causing you stress, you might have a lower risk tolerance than you originally believed. Your financial advisor can help you reassess your asset allocation and potentially tweak it to better fit your needs.
Market downturns are an unavoidable fact of long-term investing and a sound financial plan takes them into account. If you’ve already got an investment plan that reflects your unique situation, then the best thing to do during a downturn, based on the historical performance of the stock market, is to remain committed to your plan. If you would like to discuss your financial plan and risk tolerance with a financial advisor, call us at 602-343-9301 or click here to schedule a call.
This content is provided for informational purposes only. It is not a guarantee of future success, is subject to change, and is not intended to serve as the basis for an individual’s financial decisions. Investing involves risk, including the loss of principal. Strategy Financial Group does not provide specific legal or tax advice. Please consult with a qualified professional for guidance on your individual situation. Investment advice is offered through Strategy Financial Services, LLC, a Registered Investment Adviser. Insurance and annuity products are offered separately through Strategy Financial Insurance, LLC.