INVESTMENT PLANNING
7 Things To Do If Investment Markets Are In Freefall
Pat Leahy, Certified Financial Planner
August 23, 2018

First things first, the investment markets are not in freefall as we type. Investment markets have been calm for the last number of years. So much so that some investors may have forgotten how frightening economic crises can be.

Looking at past economic crises, we can see that the markets have never told us precisely when, where, or how steep their short-term movements were going to be. But, they have reliably recovered and soared – usually without warning. Those who did not panic-sell at the bottom and then tried to guess when it might be “safe” to return were ultimately rewarded with healthy returns.

So let’s pretend we are in a state of emergency, with the following fire drill. Here are seven timely actions you can take when financial markets are tanking, and, hopefully, even when they’re not.

1. Don’t panic (or pretend not to). It’s easy to believe you’re immune from panic when the financial sun is shining, but it’s hard to avoid the ‘world-is-going-to-end’ news headlines during a crisis. An emotional decision made at the height of an emergency is likely to be an expensive one. Even if you only pretend to be calm, that’s fine, as long as it prevents you from acting on your fears.

2. Remember the past. We do know that history tends to repeat itself. History tells us that from 1900 – 2016, the markets have experienced a correction about once a year. Therefore, there are pretty good odds it will happen again. A market correction is when the markets decline by at least 10%. One way to ignore the doomsayers during market corrections is to heed what decades of solid evidence have taught us about investing: Capital markets’ long-term trajectories have been upward. Thus, if you sell when markets are down, you’re far more likely to lock in permanent losses than coming out ahead. Stick with the plan.

A History of Declines (1948 – December 2017)

 

TYPE OF DECLINE AVERAGE FREQUENCY AVERAGE LENGTH LAST OCCURRENCE
-5% or more About 3 times a year 46 days Jun.-16
-10% or more About once a year 117 days Feb.-16
-15% or more About once every 3 years 275 days Oct.-11
-20% or more About once every 6 years 425 days Mar.-09

Source: Capital Research and Management Co

3. Manage your exposure to breaking news. There’s a difference between following current events versus fixating on them. In today’s multitasking, multimedia world, it’s easier than ever to be inundated by breaking news. This ‘breaking news’ can make it challenging to retain your long-term perspective.

4. Review your investment portfolio regularly. When you planned your personalised investment portfolio, it was carefully structured around your lifetime financial plan. Typically, your investment portfolio should be globally diversified, allocated to various sources of expected returns, and sensibly implemented with a low-cost approach in an evidence-based manner.

“The key to successful investing is to get the plan right and then stick to it. This means acting just like the lowly postage stamp that does one thing but does it well. It sticks to its letter until it reaches its destination. The investors’ job is to stick to their well thought out plan (if they have one) until they reach their destination. And if they don’t have a plan, write one immediately.”

Larry Swedroe, Financial Author

5. Reconsider your risk tolerance (but don’t act on it just yet). When you create a personalized investment portfolio, you also commit to accepting a measure of market risk in exchange for those expected market returns. Unfortunately, during quiet times, it’s easy to overestimate how much volatility you can stomach. If you discover you’re miserable to the point of breaking during even modest market declines, you may need to re-think your investment plans, post-recovery.

6. Increase your market exposure – if you’re able. If, on the other hand, you discover you’ve got nerves of steel, market downturns (when the market flips from a bull to a bear and values drop more than 20% for a more extended period) can be opportunities to buy. This is not for the timid! This approach is implemented if you are investing with your long-range lifetime financial plan in mind and puts you well-positioned to make the most of the expected recovery.

7. Talk to us – we don’t know when. We don’t know how severe it will be, or how long it will last. But sooner or later, we expect the investment markets will correct or even downturn again for a while, just as we also expect they’ll eventually recover and continue upward.

We hope today’s fire drill will help you be better prepared for “next time.” We also hope you’ll be in touch if we can help. After all, there’s never a wrong time to receive good advice.

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