What should I do when the market drops?
The market might be back on the mind of many investors due to tariffs imposed by President Trump. With large market swings becoming common, many are wondering how they should handle these market corrections. Let’s look at market corrections and how you might handle what’s going on with your investments today.
What’s a market correction?
A market correction is when a major index like the S&P 500 index falls 10% or more below it’s recent high. On average, they occur about once a year, but don’t always turn in a bear market (20% or more off market highs). So what should investors do when a the market drops?
Don’t Panic
Let’s say you’re riding in an airplane and you begin to feel some turbulence. Hopefully you don’t start digging around for a parachute or making any last wishes. It’s nice to hear from the pilot that things are under control and this turbulence, despite being uncomfortable - is normal.
Investing can be a lot like that plane ride. There are some bumpy patches along the way, but despite the ride, you’re most likely to get to your destination as you planned. A good financial advisor, like the pilot - can help reassure you that you’re on the right path to making a soft landing.
Market corrections are normal occurrences. Although past performance is not a guarantee of future results, each and every time there’s been a market correction, there has been a recovery at some point down the road. We don’t know how long the pullback will last, and there’s usually something different causing the pullback (Dot.com bubble, mortgage crisis, Covid, war in Ukraine, tariffs, etc.) but there has always been a new market high set after the downturn.
Even if you are one, two or three years away from retirement and you can withstand the volatility, it’s a good idea to stick to your investment plan you were OK with when things were calm. You still have time to recover if you continue to invest in your 401k and other investment accounts, even in retirement.
Continuing to add to your investments might also give your retirement nest egg a nice bump when the market recovers. Dollar cost averaging, or adding the same amount to your accounts each month regardless of current prices is a great way to take advantage of the current market pullback. You’re buying more shares at lower costs and fewer shares at higher costs. It’s a great way to bring your average price per share lower.
Review Your Investments
Are the investments you currently have in your portfolio still a good fit? Market corrections are a good reminder to take a look at your portfolio and make sure you still feel like your holdings are good investments, even when they are down around 10% from where they were a few weeks ago. It also might be a good time to rebalance your portfolio to make sure it’s inline with your financial goals and risk tolerance.
Don't Try to Time the Market
Even the smartest minds on Wall Street struggle with this, and they're often wrong. Don't try to pull your money out and then jump back in when things seem better. Usually, by the time you feel comfortable investing again, the market will be much higher than when you sold, putting you at a disadvantage. Missing out on the best days of a market recovery can seriously hurt your long-term financial plan.
Invest for the long-haul
Remember to invest for the long term. Even if you're retiring soon, you'll need your money to last. The best way to keep up with rising costs for things like food, housing, and healthcare is to invest a portion of your portfolio in stocks. According to the Society of Actuaries, there's a 50% chance that at least one spouse in a 65-year-old couple will live to be 94. If they both retire at 65, that's almost 30 years of retirement income!
Market corrections can be unsettling, especially if you check your account frequently. If you're worried about your long-term retirement outlook and don’t feel like your plan is headed to its destination, feel free to reach out. Brian@ChisholmWM.com
