By David Allen, CFP® & Frank Lovaglio
It might be hard to believe that a market downturn is coming, what with the markets having the best first half of a year since 1997 (1) and the Dow having the best June since 1938. (2) But as we know, all good things must come to an end, including our current record-breaking bull market. We’ve been through downturns before, and we’ll go through them again. The important question is: Will you be ready? Here are a few things to keep in mind that will help you prepare for the next market downturn, whenever it comes.
Avoid Emotional Investing
First, let’s talk about what you shouldn’t do. One of the most important rules in investing is to refrain from making emotional decisions. Multiple studies have analyzed how our emotions affect our investing results, especially when we chase above-average returns. A 2018 DALBAR study revealed that investors’ decisions were the biggest reason for underperformance. (3) Simply put, behavioral biases lead to poor investment decision-making.
You also don’t want to start making major changes to your account in anticipation of a downturn. Erring too much on the side of caution too many years ahead of retirement may prevent you from gaining the potential returns you need to retire on your terms. For example, in a panic, some investors may sell stocks and pursue safer investments like annuities, bonds, and cash.
Instead, relying on an experienced professional to help you understand your options and control the risk you take with your retirement money will allow you to react unemotionally to a rising and falling stock market—instead of guessing what to do next.
Diversify Your Investments
In the 1990s, investors placed their money heavily into the early e-commerce sites, and when that bubble burst, it birthed what is now famously known as “The Dotcom Crash.” (4) When people were losing faith in the stock market, they looked at real estate as well as their own homes as the place to focus their sights (and money) on. However, the constant speculation and unsustainable rise in home values eventually led to the Housing Market Crash of 2008, (5) and eventually bled into the Great Recession. If history teaches us anything, you never want to put all of your eggs in one basket as it’s never a guarantee that the basket will never fall.
Instead, diversify your portfolio with a combination of different investment sources. Modify your portfolio to include stocks of varying risk levels (safe, moderate, and high risk), and spread your money out between stocks, bonds, funds, and investments in different sectors. In this way, you can minimize the impact that any one losing investment can have on your overall portfolio performance.
Diversify Your Income
Economic downturns often go hand in hand with job instability. So, in addition to diversifying your investments, consider diversifying your income sources as well. Besides your salary, consider where other sources of income can and will be coming from. This might mean investing in rental real estate or other income-producing investments such as higher-yielding stocks and bonds, picking up a side job, starting your own small business, or making money online. The more diversified your income, the safer you’ll be.
Create An Emergency Fund
This strategy is all about preserving the wealth you’ve accumulated to this point. While cash investments may not provide a lot of growth, having a cash contingency fund with at least six months of living expenses will protect you against having to sell investments at low values to free up cash. Examine spending patterns and find ways to tuck away even more into cash or cash equivalents, such as short-term bonds, certificates of deposit, or Treasury bills.
Stop Trying To Predict When The Next One Is Coming
The only long-term guarantee in investing is that there will be short-term fluctuations. We’ll experience bear and bull markets in the decades ahead just as we have in the past decades. Rather than fear change, focus on preparing for it.
Are you ready to see all your options for protecting your money? At Security Financial Management, we would love to start that conversation and answer any questions you may have. Schedule a call today!
About Security Financial Management
Security Financial Management is an independent financial services firm dedicated to delivering exceptional service built on reliability and trust. With 3 locations in Central Florida and 1 in Rochester, MN, SFM has been partnering with clients for over 25 years, providing comprehensive financial planning and acting as a personal CFO. To learn more about Security Financial Management, connect with them on LinkedIn.
Advisory services offered through Investment Advisors, a division of ProEquities, Inc., a Registered Investment Advisor. Securities offered through ProEquities, Inc., a Registered Broker-Dealer, Member, FINRA & SIPC.
Security Financial Management is independent of ProEquities, Inc.
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(1) https://www.cbsnews.com/news/best-first-half-for-u-s-stocks-since-dotcom-era-20-plus-years-ago/
(4) https://www.investopedia.com/features/crashes/crashes8.asp
(5) https://www.investopedia.com/features/crashes/crashes9.asp