A decline in the stock market is rarely something to find joy in. Sharp declines can put a pit in your stomach and make you think “What if this is the big one?”. This post is to help ease those fears and encourage you to come up with a plan to deal with a market decline.
Before we start, I want to define a few terms that will be mentioned in the post. The first is a market correction. A market correction refers to a decline of 10.0%-19.9%. So if you had a starting value of $100,000 then correction territory would put your portfolio somewhere between $80,100 - $90,000.
The next definition is a bear market. These are a much more severe decline and often last longer than market corrections. Bear markets result in a market decline of 20% or more. If you had a starting value of $100,000, then a bear market would start once your portfolio dipped below $80,000.
Here are 4 tips to keep you on the right track in this tumultuous and volatile time.
1. Don’t Panic
Often easier said than done, but the number one and most important tip is don’t panic during a market decline. Panic often results in you selling stocks when prices are low and you will likely miss out when stocks rebound while you are sitting on cash. Market declines are actually quite normal and are healthy proof of supply and demand. Since the beginning of the 2009 bull market, there have been 7 market corrections in the S&P 500. As of this writing, we are currently is the midst of the 7th correction - That’s one every ~18 months. There were another two market declines just below 10% during this time as well. There have been 9 bear markets since 1950, or one every roughly 7 years and 8 months. Market declines happen; it’s a part of the investment experience.
2. Investigate Investing Cash
If you have cash waiting to invest (not cash from selling stock during the correction), a market decline may be an opportune time to invest in the stock market. Markets tend to “overreact” and decline more than they should, so you are buying stocks while they are “on sale”. It’s the adage of buying low and selling high in real life. It may not feel “good” to invest in the stock market while it’s going down, but in the long-run, you will likely benefit.
3. Have A Plan
Having a plan before a market decline is a great way to weather the storm. Knowing what to do and sticking with it will ease most of the anxiety you are feeling. Reacting to the news of the day rather than following a blueprint is a recipe for disaster.
4. Meet With or Contact Your Financial Advisor
If you have a financial advisor, now is the time to meet with or get in contact with them to get a status update. If you find your advisor is ignoring you, this should be cause for concern. It’s natural for someone to not want to give you bad news, but you hired (and are paying!) them to give you advice through thick and thin. You need to know your advisor has a plan for you and what they are doing to represent your financial interests. If you find it difficult to get in contact with them, now may be a good time to see if there are better options available.
Are you needing a plan or guidance to help deal with a market decline? Schedule a meeting online and we can get started.
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About The Author
Shaun Melby, CFP® provides fee-only financial planning and investment management services in Nashville, TN. Melby Wealth Management serves clients as a fiduciary and never earns a commission of any kind. Shaun has over 10 years of experience as a financial advisor in Nashville.