So far, 2016 is off to a rough start for investors. As of the market’s close on Jan.15, the S&P 500 Index was off about 8 percent. And on Jan. 20, the Dow Jones Industrial Average fell nearly 250 points, its lowest close since August, reports the Wall Street Journal.
As tempting as it might be to sell your stocks and run for the hills when the stock market falls, that might be the last thing you want to do. Instead, here are 20 things experts say you should do when the stock market is down.
“Investors should expect volatility and market ups and downs," said Sterling Raskie, a certified financial planner (CFP) with Blankenship Financial Planning in Illinois. "If an investor is properly diversified — holding a portfolio of low-cost index funds, for example — then they shouldn't fret about fluctuations. They can rest easy knowing that this is the norm, not an exception.”
Relaxing also allows you to make rational decisions that are not based on fear. When you make investment decisions based on fear, it usually ends badly.
2. Turn Off the TV
Turn off the TV and ignore the media hype, said CFP Katie Brewer, founder of the fee-only firm Your Richest Life.
“Yes, this sounds like funny advice, but staring at a panicked news anchor that is proclaiming that the stock market is crashing will only make you feel nervous and unsure about your long-term strategy," she said. "Turn off your TV, and go for a walk.”
3. Don’t Act on Impulse
“Stock markets outperform in the long-term," said Wendy Nissan, co-founder of DYI.Fund, a site that helps investors create and maintain stock portfolios. "The 20-year return on the S&P is 9.9 percent, and that's including the market crash of 2008. Individual investors have only returned 2.5 percent in that same time period in large part due to fear. Take a deep breath, and don't do anything impulsively.”
4. Stick With Your Investment Strategy
Instead of selling stocks and coming up with a new investment strategy, stick to the one you have.
“It is easy for investors to want to sell their stocks and hold cash, but market timing can be an exercise in futility and frustration," said Cameron J. Penney, a CFP and founder of Penney Financial, a financial services firm. "In fact, the average intra-year drop of the S&P 500 in the past 36 years is 14.2 percent. However, in 27 of those 36 years, the S&P 500 still returned positive for the calendar year.”
5. Know What You Own
“Do not put your head in the sand," said Nissan. "Even if you don't want to see the value of your holdings, you need to know where you are invested, how risky your holdings are and if this is how you want to be positioned in this market.”
6. Review Your Asset Allocation
Has your portfolio weathered this storm, and are the declines of this past summer what you expected? If so, your asset allocation is likely appropriate. If not, then perhaps it's time to review your asset allocation and make some adjustments. Proper diversification is a great way to reduce investment risk.
7. Rebalance Your Portfolio
Assuming that you have a financial plan and an asset allocation strategy in place, a stock market downturn is a great time to review your allocation as well as rebalance if needed. You can certainly buy and sell holdings to get things back in balance. Other methods might include adjusting ongoing contributions to your 401k and committing new cash to the underweight areas of your portfolio.
And don't forget to review your entire portfolio as a whole — this includes taxable accounts, IRAs and your 401k.
8. Meet With a Financial Planner or Advisor
If you tend to panic during periods of market uncertainty, a professional financial advisor or planner could help calm you down and also help you rebalance or reallocate your portfolio, if necessary.
“If you find yourself wanting to adjust your allocation only due to current market conditions, you may find value in working with a financial planner to align your goals and investment strategy,” said financial advisor Gregory Curry of Pillar Financial Advisors.
9. Make Sure You Have Cash in Your Portfolio
“You should always have a cash position in your portfolio," said wealth manager Kirk Chisholm of Innovative Advisory Group. Cash doesn't necessarily pay well, but it does lower your risk and allows you to invest when the stock market dips.
"Many investors worry about inflation eating away at their cash," added Chisholm. "However, when inflation is essentially zero, you don’t have to worry about losing your purchasing power.”
10. Educate Yourself on Stock Market Risks
“Becoming more familiar with the risks that could affect an investor's portfolio value might put an investor more at ease when the value drops substantially," said Penney. "For example, knowing that the broad stock market has a history of large swings and volatility — and that 10 percent downturns are not abnormal — can help investors remain calm in a falling market.”
11. Read Investment Books
“If you don't understand how the investment markets work, you're much more likely to panic," said Barbara A. Friedberg, a veteran portfolio manager and author of "Invest and Beat the Pros-Create and Manage a Successful Investment Portfolio." "Panic can lead to making rash decisions, like selling at a bottom and upending your entire investment plan."
She recommended two of her favorite investment books for panicky investors: "The Elements of Investing" by Burton G. Malkiel and Charles D. Ellis, and "A Random Walk Down Wall Street," also by Malkiel.
"The more educated you are, the less you're likely to panic when markets tank,” said Friedberg.
12. Harvest Tax Losses
“If you have investments in taxable accounts that are worth less than you paid for them, you may be able to realize those losses for tax purposes without affecting your allocation," said Curry. "There are specific tax rules, so it’s always best to consult with your tax advisor prior to harvesting your losses.”
13. Focus on Your Long-Term Goals
Fiduciary financial advisor Russ Thornton, who provides financial planning services to women through Wealthcare for Women, said, “Hopefully, your investing aligns with your longer-term life goals and aspirations, and it would be awful to let your long-term plan become derailed by a short-term investment decision because the market has fallen over the course of a couple weeks."
He added, “Instead, revisit your plan and remember why you’re investing in the first place. Typically, emotionally important goals like retirement, college for your kids or leaving something to a favorite charity can make the difference in keeping your plan — and your investments — on track.”
14. Buy Stocks at a Lower Price
Here's one way you can take advantage of a stock market downturn: Buy your favorite stocks at cheaper prices.
"Think of a falling stock market as an opportunity to buy your favorite stocks on sale," said Nissan. "If your fundamental view on a company hasn't changed, then use the cheaper price to buy stocks that now have more upside than they did last year.”
Note, however, that while a cheap stock with solid fundamentals is a bargain, a stock that is cheap because its business model has deteriorated is not. You should always conduct a strong analysis of any stock you are considering buying.
15. Increase Your Contributions to Your Savings or Retirement Accounts
Raskie also agrees that you should be an opportunist when the stock market starts to dip. In addition to buying discounted stocks, you might as well put more money into your savings and retirement accounts.
"These buying opportunities can enhance future wealth greatly," he said. "Some ways to do this are increasing 401k contributions, IRA contributions or putting more into your child's 529 savings plan.”
16. Accelerate Your Mortgage Payments
“Since it may be difficult to make even 3 percent or 4 percent in a falling stock market, the one guarantee you do have in terms of making a rate of return is to accelerate paying off your mortgage," said Ted Jenkin, a CFP and co-CEO of oXYGen Financial. "It doesn’t matter when you expect your real estate to [go] up or not. The guarantee is in the interest you are saving by paying down the mortgage quicker.”
17. Consider Using Options
Options are great risk-management tools. The key, however, is to ensure that they are used correctly.
"Options were originally created to manage risk on investments," said Chisholm. "However, they are perceived as risky because some investors use them to speculate rather than manage risk. Covered calls, zero-cost collars, spreads and naked puts can all provide you with some downside protection if you use them the right way. In a bear market, while volatility is rising, consider using options to protect your portfolio.”
18. Don’t Lose Sight of Your Stock’s Underlying Business
Marvin Simms, publisher of the TSP Investing newsletter, said, “During market sell offs or panics, a lot of investors fail to take the underlying business into consideration. Yes, a stock may have fallen 20 percent to 30 percent due to market conditions, but has anything changed in the business? Blue chip companies rarely deserve the discounted valuations in a bear market because their financials are stable."
19. Revisit Your Withdrawal Rate
If you're a retiree, you should revisit and — if needed — revise your annual withdrawal rate from your retirement nest egg. Over the past six-plus years, the stock market has staged a nice rally, and many retirees have likely allowed their spending to creep up.
The stock market decline to start 2016 doesn’t necessarily mean you should drastically alter your lifestyle, however. But, this is a good time to revisit your spending and adjust withdrawals if needed.
20. Take Stock of Where You Are
And lastly, review all of your investment accounts and see the extent of the damage that has actually been done. Investors who are well-diversified have probably been hurt but not to the extent of those with a heavy allocation to equities and other areas that have been hit.
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