For the past several years, people have been vehemently predicting a market downturn. As a result, you’ve probably seen plenty of headlines about what to do when the market goes down, but lately it seems the market doesn't care what everyone thinks, as is evidenced with by it reaching all time highs.
The Market Is At An All Time High
In March, the Dow closed above 21,000 for the first time, and in May, the S&P 500 finally broke the 2,400 mark. As you can see from the following graphs, the markets are soaring these days.
Summer is traditionally a soft season for stocks, yet they continue to trade at or near record highs. Even volatility has calmed, and the markets appear to be ignoring the political arena for the most part. (3)
These record highs are what have led to a glut of advice on market downturns. Yes, the markets will slow down eventually, but they haven’t yet. So store up that advice for the future and focus on what you should be doing right now. What should you do when the market is up?
Rebalance Your Portfolio
With the markets performing as they have been lately, chances are your asset allocation has gotten a little off. The high returns that parts of your portfolio are generating are shifting your portfolio off balance, with some investments growing much faster than others.
Though it may seem counterintuitive to sell off your winners, rebalancing is a wise and proven investment strategy. You need to rebalance your portfolio by selling some of your overachievers to purchase underperformers. This will keep your portfolio from having more risk than you are comfortable with. What was once only 10% of your portfolio can easily grow to 20% or 30% in a bull market like this. Readjustments may be necessary.
Don’t Get Greedy
Fight the human tendency toward greed. As we’ve already mentioned, high returns can be very enticing. Rushing after them, though, can lead you to a dangerous place!
Make a conscious effort to avoid the hype and stick to your investment plan and corresponding asset allocation. Remember the risk tolerance level that you established for yourself. If you’re unsure how much risk you are prepared to take, sit down with your advisor to determine your unique risk level.
Don’t let record highs tempt you into making poor decisions. Remember, the investments that shoot up are usually the ones that drop the lowest when the markets go down. By avoiding greed and rebalancing your portfolio, you will put yourself in a better position in the case of a market downturn.
Be Prepared For A Correction
The pundits are right that the markets will correct themselves. Eventually. It’s just the timing that is impossible to predict. It is important to recognize the reality of market cycles and prepare for the inevitable downturn.
To prepare your portfolio for a market correction, you simply need to maintain an asset allocation that is in line with your risk tolerance and refrain from greed.
Your portfolio isn’t the only thing you need to prepare for a bear market, though. You need to prepare yourself mentally. When the market goes up for as long as it has been, it’s easy to start taking it for granted and expect it to continue. Many people are caught off guard during market corrections and let fear and anxiety take over.
Don’t let your emotions get the best of you. As long as you are following sound investment principles, only investing long-term money, and keeping your assets within your risk tolerance, you should have no reason to panic. Yes, things may drop momentarily, but you can keep worry at bay knowing that you are in it for the long haul.
How I Can Help
If you’re not feeling as confident as I am, maybe you could use a portfolio review. I can help you create tailored financial strategies and find peace of mind despite the ups and downs of the market roller coaster. Call me today at 734-330-7033 or email firstname.lastname@example.org for your complimentary, no-obligation financial analysis. I can show you how to take advantage of this great bull market while staying prepared for the next bear market.
Chris Rueger, AAMS® is the President and Founder of Pilot Wealth Management, a fee-based only financial advisory and investment management firm. With nearly two decades of experience, he serves as a financial planner who brings financial advice and investment guidance to families serious about their financial future. With all his clients, he strives to instill in them peace of mind that their life savings is being handled appropriately so they can maintain their desired lifestyle. Based in Ann Arbor, Michigan, he works with clients locally and across the country. To learn more, connect with him on LinkedIn.