Have a solid investment plan to weather stormy markets
When the stock market is nerve-wracking as it has been, investors need to make sure that any decisions they make are part of the big plan instead of the result of panic.
That’s easier said than done. While some investors can stay the course and never worry about the market’s short-term volatility, others need to do something to feel like they are in control.
Indeed, anyone truly convinced that a massive bear market is about to begin is likely out of the market already. For example, some $24 billion was pulled from stock funds over the first three weeks of 2016, according to Bank of America Merrill Lynch.
The physical symptoms of a panic attack include a racing heart, sweats or chills, feeling faint or dizzy, a sense of impending doom or terror, a perceived loss of control and more. Investors who feel any of those things about their portfolio have a mix that’s off-kilter with their risk tolerance.
They feel panic because they aren’t comfortable with the market’s prospects and/or can’t live with any plan they have in place. At that point, hanging on and hoping for the best — even if it’s a viable strategy — may not be realistic.
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Yet before selling anything into this market, ask yourself these questions:
1. Does a sale protect my nest egg, or my ego?
If you sell in order to protect gains or because you expect a downturn in a specific security or market, you’re locking in profits but should also be looking to put the money to work where you see better opportunities. You’re not motivated to change your asset allocation, but rather to maintain your holdings, so the money shouldn’t head to the sidelines for the long haul.
That said, if you are protecting retirement savings because you fear a market meltdown, the money should stay on the sidelines longer, and it may be redeployed into assets that you believe are safer and/or more consistent.
And if you are moving money because of an emotional response to the market’s volatility, consider how your portfolio should be constructed or rebuilt. Pulling money simply to get out of the danger zone is impulsive; that’s the panic-stricken move to avoid.
2. What has changed about the investment?
If the investment itself has changed — a mutual fund has a new manager or a stock is in an industry looking at tight conditions, for example — that’s always a reason to consider a change.
Strategic reasons to sell make sense regardless of market conditions, though typically are acted on only when the storm clouds arrive. If you’re selling out of fear, that’s letting market volatility dictate your strategy rather than having a strategy that positions you comfortably to deal with the market.
3. How does a change affect my portfolio’s risk profile?
If you go 100% to cash, you face zero stock-market or principal risk, but you trade that for purchasing-power risk — the chance that your money can’t keep pace with inflation.
Balancing risks is why investors diversify; if you unload a piece of the portfolio, check how it changes your asset allocation. Beware of anything that puts all of your eggs in one basket, even if it feels safe and smart at the moment.
4. How am I redeploying the money — now and in the future?
The problem with making moves to calm the nerves is that people who panic have a tough time getting back into the market. Meanwhile, folks who follow trends — like a moving-average — or technical analysis have specific targets they are looking for that will have them back in the market.
Over the long haul, investors need to balance protecting their money with growing it; achieving that balance with advance planning helps ensure that today’s nervousness doesn’t extend indefinitely.