When the stock market starts to plummet, will you be prepared? The time to start planning for a market downturn is certainly not after it occurs. If your portfolio – and by extension your finances – are managed so they can withstand down markets, the chances of a prolonged downturn messing with your long-term investment objectives are greatly diminished. Being prepared, you are less likely to give in to your emotions and make major investing mistakes at the worst possible time.
Some things to keep in mind in preparing for stock market downturns, which by the way, are inevitable:
- Diversification can reduce risk. Portfolios that include fixed income, U.S. equities, international developed and emerging markets as well as some alternative assets tend to fare much better in terms of price volatility than portfolios containing mostly equities.
- High quality bonds and funds have historically held up well during equity downturns. They tend to act as anchors during rough market seas. Stocks do tend to outperform bonds over longer market cycles, but bonds provide stability when it’s needed most.
- Stocks can fall far and fast but also tend to recover eventually. Bailing out of stocks after they pull back can lock in losses, making it harder for you to achieve your long-term financial goals since you are then more likely to miss out on a recovery. Instead, if your portfolio is well-diversified and meets your near-term income needs, it’s often wise to stay invested, while making sure that your investment team is looking for rebalancing opportunities, as well as opportunities for tax-loss harvesting.
- Alternative assets, such as hedge funds and managed futures, have the potential to reduce the impact of down equity markets through various types of short selling and arbitrage unavailable to traditional asset managers. As such, their returns tend not to be closely aligned with the performance of stock and bond indexes.
Risk Management, Not Risk Avoidance
If you want your “real” return (after inflation and taxes) to keep growing, there’s no way to totally avoid risk in the financial markets. Market declines are what allow portfolios the chance to buy low and eventually sell high. Down markets also test how well portfolios are constructed. And more often than not, when you see abnormal fluctuations in your portfolio well outside of benchmark movements during choppy markets, then your portfolio might not be very well well-built, akin to beach bungalows trying to make it through hurricane season. Can your portfolio weather the storm?
If not, then why not? Because there is usually not enough emphasis placed on managing risk from the very beginning, when the portfolio is first constructed. That is something we think sets LNWM apart. Our investment planning prepares client portfolios to be ready for the inevitable ups and downs of various economic cycles. We focus on preserving your capital from Day 1.