I’m a Financial Planner: 12 Tips To Conquer Fear of Losing Wealth Due to Market Downturns
Written by
Cindy Lamothe
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Molly Sullivan
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Dealing with the fear of market volatility is going to be somewhat different for everyone. That said — knowledge is your best friend.
GOBankingRates spoke with financial planners Joseph Favorito, certified financial planner and managing partner at Landmark Wealth Management, and Abid Salahi, finance expert and co-founder of FinlyWealth, for their top tips to conquer your fear of losing wealth due to market downturns.
“Fear during market turbulence is natural but often leads to poor financial decisions,” Salahi said. “Studies show that investors who panic-sell during downturns typically underperform the market by 4%-5% annually over the long term.”
He noted this fear-driven behavior can significantly erode wealth over time.
“One of my clients exemplifies the power of overcoming this fear. She resisted selling her investments during the 2020 market crash despite a 30% portfolio drop. Her portfolio recovered and grew by 45% over the next 18 months by sticking to her long-term strategy.”
Below are actionable tips to conquer fear during market downturns.
Understand Market History
“Educate yourself on past market cycles,” Salahi advised.
“Since 1926, the S&P 500 has experienced 26 bear markets, yet it has yielded an average annual return of about 10%.”
He said this historical perspective can provide comfort during downturns.
Favorito emphasized the same: “Dealing with the fear of market volatility is going to be somewhat different for everyone.”
However, he said knowledge is your best friend.
“Presuming that you are matching your risk profile with your goals correctly, then you must accept some level of volatility. You cannot completely divorce risk from return. Understanding what the historical norm has been can give you some context in terms of what is happening in the moment.
“As an example, the average intra-year decline in the S&P 500 for the last 50 years has been about a -14% decline from peak to trough. This can happen at various points during the year.”
However, he added that historically, the S&P 500 still ultimately finishes positive 75% of the time.
“The average bear market leading up to and during a recession sees a cumulative decline in the S&P 500 of about -30%. Yet, the following 12 months is an average cumulative return of about 44%, which is enough to break even from a -30% decline.”
That means that on average, a bear market historically only takes 12 months to recover from.
According to Favorito, understanding the data can ease your nerves when those periods of volatility happen.
“Investors often assume that they don’t have enough time to recover. That is historically not the case if they have built a portfolio using the proper degree of diversity and risk mitigation.
“There is an old saying when it comes to investing. ‘Never bet on the end of the world, because it’s only going to happen once.'”
Implement a Robust Asset Allocation Strategy
Salahi advised diversifying your portfolio across various asset classes.
“A well-diversified portfolio can help mitigate losses during market downturns. For instance, a portfolio with 60% stocks and 40% bonds has historically limited losses to about 20% during significant market declines.”
Focus On Your Time Horizon
Experts recommended keeping in mind that short-term market fluctuations matter less if you invest for the long term (10+ years).
“Remember, time in the market beats timing the market. Over any 20 years in history, the S&P 500 has never delivered a negative return,” Salahi said.
Practice Dollar-Cost Averaging
Salahi suggested that instead of trying to time the market, invest a fixed amount regularly.
“This strategy can help you buy more shares when prices are low and fewer when they’re high, potentially lowering your average cost per share over time.”
Maintain an Emergency Fund
Keep three to six months of living expenses in a liquid, low-risk account.
“This financial cushion can provide peace of mind and prevent you from selling investments at inopportune times,” Salahi said.
Reframe Your Perspective
Salahi advised viewing market downturns as opportunities rather than threats.
“Warren Buffett famously advised to be ‘fearful when others are greedy and greedy when others are fearful.’
“Many of history’s most excellent wealth-building opportunities have occurred during market lows.”
Conduct Regular Portfolio Reviews
Quarterly reviews help ensure your investments align with your goals and risk tolerance.
Experts say this proactive approach can boost confidence in your strategy during turbulent times.
Use Tax-Loss Harvesting
“Consider selling investments at a loss to offset capital gains taxes during downturns,” Salahi said.
He said this strategy can help you save on taxes while maintaining market exposure.
Seek Professional Guidance
A financial advisor can provide objective advice and emotional support during market volatility.
“Studies show that advised investors typically outperform non-advised investors by 1.5%-4% annually, mainly due to behavioral coaching,” Salahi said.
Practice Mindfulness
Techniques like meditation can help manage stress and prevent emotional decision-making. Even 10 minutes of daily meditation has been shown to reduce anxiety and improve decision-making under pressure.
Set Realistic Expectations
“Understand that market volatility is average,” Salahi explained.
“Expect your portfolio to experience periodic declines of 10% or more. This mental preparation can help you stay calm when downturns occur.”
Use a Bucket Strategy
Salahi recommended dividing your portfolio into short-, medium- and long-term buckets.
“Knowing you have cash and stable investments for near-term needs can help you tolerate volatility in your long-term investments.”
Overall, experts urged people to remember that successful investing is not about avoiding all losses but managing risk and staying committed to your long-term financial plan.
“By implementing these strategies, investors can build resilience against market fears and position themselves for long-term economic success,” Salahi said.
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