Don’t Be Spooked by a Market Correction!Submitted by Washington Wealth Advisors | Falls Church and Ashburn, VA on October 21st, 2017
It’s that time of year when the ghosts and goblins appear and start to spook our children…and sometimes us! Along the same lines, we continue to get questions about how long this bull market will continue and when will it get spooked? There are few things in investing (and life) that are guaranteed. But the one thing we can count on for sure is that the market won’t stay at the same level. What goes up can come down.
The Reality About Market Corrections
A market correction is when the markets decline at least 10% to adjust for overvaluation (when the price of a stock is inflated). Corrections tend to be short-lived interruptions in the middle of an upward market trend. While we aren’t doomsday prophets, we do know that history tends to repeat itself and history tells us that from 1900-2016 the markets have experienced a correction about once a year. (1) So, there are decent odds it will happen again.
While it’s especially difficult if you’re close to retirement, experienced long-term investors know it’s important to stay calm during a market correction. Market volatility has increased in recent years, and the media can often make it seem like another market crash is imminent. In reality, volatility does not hurt investors, but selling when the market is down locks in their losses.
Successful investing is more like a marathon than a sprint, and it’s important to have a long-term game plan to stay on track. At Washington Wealth Advisors, we work together with our clients to plan for expected market volatility and stay on track during unexpected market drops. Here, let’s look at a few steps you can take to help you feel more confident during a market correction.
1. Stick to the Plan
One of the most important rules in investing is to refrain from making sudden or emotional decisions. Multiple studies have analyzed how our emotions affect our investing results, especially when we chase above average returns. A 2015 DALBAR study revealed that investors’ decisions were the biggest reason for underperformance. Simply put, behavioral biases lead to poor investment decision-making.
It’s easy to get swept away emotionally when the market negatively wreaks havoc on your finances. But if you stay true to your investment strategy and avoid making decisions when emotions are running high, you won’t run the risk of losing even more. As long as you have created a disciplined financial plan and are rebalancing your portfolio regularly, you are setting yourself up for success. Your number one priority is to protect your principal, so don’t gamble with your investments when the market is struggling.
2. Reevaluate Your Asset Allocation
We’ve all heard about the importance of diversification when it comes to maximizing our investments. But if you’re worried about your approaching retirement and potential market volatility, now may be the time to ensure that you have the right asset allocation based on your risk tolerance. In this way, you can minimize the impact that any one losing investment can have on your overall portfolio performance.
Your portfolio should be reviewed annually to ensure that it still reflects your appropriate level of risk. If it doesn’t, you may need to rebalance to keep your portfolio on the right track. Rebalancing consistently is one of the most proactive measures an investor can take to avoid feeling the burn of a market correction.
3. Remember a Few Key Investment Rules of Thumb
Whenever our clients come to us with concerns about market volatility or a correction, we like to remind them of what we consider investment rules of thumb:
- Corrections are normal. Market downturns are a normal and healthy part of market cycles, and they occur regularly.
- Avoid rash buying and selling. No one can consistently predict the right time to get in or out of the market. Following a plan will allow you to avoid the pitfalls of selling low and buying high.
- Focus on your goals. A specific return rate shouldn’t be the goal of investing for most of our clients; rather, the goal is retiring on your schedule, saving to purchase a second home, or sending your kid to college. With this in mind, your focus can shift more towards annual progress toward your goals rather than market performance.
- Losses aren’t realized yet. You’ll only realize losses when you sell. When the market returns to normal, your returns will start building up again.
4. Communicate with Your Advisor
Research shows that even the most experienced investors make better decisions after consulting with an objective third-party. Human nature causes us to act out of emotion when our accounts go down.
At Washington Wealth Advisors, we serve as a support system for our clients, helping them make informed and intentional financial decisions. If you are anxious about the market or considering changing your investments, speak with your advisor first. Sometimes, discussing with your advisor may help you feel more aligned with your long-term plan and less concerned with the day-to-day market activity.
If you have questions about your portfolio or investment goals, we would be happy to meet with you and discuss how we can help. To get started, call our office at 703.584.2700 or email firstname.lastname@example.org. Or, you can schedule a meeting online.
About Washington Wealth Advisors
Washington Wealth Advisors is an independent registered investment advisory firm serving high net worth families and small businesses. We focus on holistic financial planning and comprehensive investment management. Leveraging our core strengths of unbiased, active investment management together with a detailed annual financial planning capability, we serve your comprehensive investment and financial planning needs.