During a market correction or extended economic downturn, individuals may become concerned over the best approach for their investment portfolios. This is a valid concern, as making the wrong financial moves during these periods can produce a negative impact and take years to recover.
Below are some key points to consider during difficult economic conditions.
One of the most important rules of investing is to refrain from selling due to general market volatility fear. Fighting the temptation to sell a specific asset may be difficult, but it should be carefully considered. As long as your portfolio is appropriately diversified for your risk tolerance and time horizon you should be cautious of making broad shifts in your portfolio due to general market swings. Over time the market should respond to improved conditions and recover. If your portfolio is out of the market when this rebound begins it may underperform your target portfolio for many years.
Keep in mind that sticking with a long-term strategy does not mean set it and forget it. There are tactical adjustments that should be considered during slow economic periods.
Stick with your Investment Plan
When facing losses in your portfolio, it may be tempting to place your investment plans on hold. However, continuing to make contributions to your investment plans during these negative periods is something to consider. Ideally, your monthly contributions are buying a broad mix of securities at lower prices and accumulating more shares. This lowers the average cost of your portfolio and may help your returns in the long-run.
Additionally, if you stop making contributions to your qualified retirement plans, you may be passing up employer contributions or tax benefits.
Maintain Your Emergency Savings
Keep a three- to six-month emergency fund for unplanned events that would prevent you from meeting your essential monthly expenses. These funds can then be available in the event of a medical emergency, job loss or other challenging situation.
Re-evaluate Your Risk Tolerance
When faced with a disruption in your income or assets, it is important to re-evaluate your capacity for risk with your investments. Increasing the allocation of a portion of your investments to more conservative positions may be required. This will provide a more predictable secondary source of assets if needed.
Review Your Portfolio for Diversification
Ensure your portfolio is appropriately diversified. Use your risk tolerance and time horizon to establish a target asset allocation. While diversification does not assure a profit nor does it protect against loss of principal, it's understood that asset allocation is the largest determinant of long-term performance.
If your portfolio is out of balance based on your target allocation you should make the necessary adjustments. There are minor adjustments to consider during an extended economic decline. Some asset classes will typically perform better during these periods, so you should speak to your investment professional to explore these opportunities.
Look for opportunities to make adjustments that will reduce declines and improve your returns when the economy begins expanding. Do not use this as a time to make massive shifts in your investment plan or to chase high performing areas.
To recap, remember to stay calm, stick with your plan, maintain your emergency savings and re-evaluate your risk tolerance and portfolio holdings. Market swings are a natural and expected part of the long-term investment process – use these as an opportunity to review, as opposed to a reason to overreact.
John Leis is Vice President of Personal Financial Solutions for American Century Investments. He may be reached at 816-340-4271 or firstname.lastname@example.org.