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Thirty Mile Financial: What to Do When the Markets Drop  Thumbnail

Thirty Mile Financial: What to Do When the Markets Drop

Without a doubt, the markets have been crazy lately. It seems almost every day you check the stock market and the S&P is down 5 percent one day, and up 3 the next. What do you do? If you feel like you can't take the volatility and are thinking about selling perhaps, you should take the advice of some of the world's most successful investors, and take a break from the financial news.

You may be seeing dollar signs flying out of your wallet, and have the urge to get on the internet to sell. Remember, it's not a loss if you don't sell, it's just numbers on a screen. Sure these numbers represent real money, but approaching the situation with less emotion will go a long way to preserving your portfolio. You may even see an opportunity to buy.

Perhaps the best advice is to stick with your plan. If you don't have a plan, now is an excellent time to engage a financial planner to review your financial situation and help you mitigate risks in your investments. 

Advice From the Oracle

Billionaire and real estate magnate Warren Buffet told CNBC in 2016 that buying or selling in a rush manner may not be the best strategy. "If worried investors are trying to buy and sell stocks, and worry when they go down a little bit … and think they should maybe sell them when they go up, they're not going to have good results." Such a panic move could unbalance your portfolio where you are either taking on more or less risk than you should.

Keep a Balanced Portfolio

Rebalancing your portfolio is a must for surviving a stock market crash. Rebalancing involves selling winning investments to put more money into investments that have gone down, also known as buying low and selling high. It's not a panic buy; it's a systematic move that brings your portfolio back to its original asset allocation.  Methodically rebalancing during market volatility is a smart way to set up a portfolio for higher returns in the long run, while maintaining a desired level of risk. 

Resist Panic Selling

If you sell in a rush to get out of a down market, you could end up missing some significant gains when it corrects. A few bullish days in the market can yield a considerable return; however, you will miss those few days that could make a $50,000 difference over a decade of investment.

Buffet advised looking at the quality of your investment to determine whether you have made a good investment and not look at the day-to-day activities of the markets. You can't judge your investment strategy by short periods; you have to view your investments with a long-term outlook.

Taking Advantage Of Tax Laws

Many financial planners suggest a strategy to create tax losses to offset capital gains by selling an investment. If your gains are less than your losses, you can claim those losses on your tax return. You can carry over losses greater than the amount you can claim on your annual return to another tax year. The strategy is called tax-loss harvesting. A good financial planner can assist you in developing a strategy that works for you.

Another thing that many financial planners agree on is to stay calm. Staying in the market during a crash is important for younger investors. Older investors may be worried that the market crash will adversely affect their retirement nest egg.

Protect Your Nest Egg

If you're anxious about things like a college or retirement fund, you can take steps to protect these funds.

  1. Reduce your debt. If you start losing money in the market that threatens to deplete your funds, you don't want to have to pay creditors while trying to take care of yourself and maintain your accounts. Look to reduce your debts as much as possible and avoid taking on new debts that you may not be able to pay.
  2. Ask your financial planner about reducing the amount of risk you have. You'll at least feel more confident about your portfolio if you know that you'll have a healthy portfolio that's relatively immune to fluctuations. Now is an excellent time to check with a financial planner to make sure you're not taking on to much risks in your portfolio. A few simple moves can go a long way toward reducing overall risk. 
  3. Don't invest money you think you may need. This is especially important for retirees who may only have investment income to rely on as they get older. If you know you're going to need money, you'll want to set money aside in very low-risk accounts. Many financial planners suggest using a bucketing strategy or some other money management strategy that segments near, intermediate, and long-term money for spending and investment needs.  

Young or old, the best protection may be to consult a financial planner before making any investment moves. Speaking with a professional can give you peace of mind and sound advice during economic turmoil. 

If you have questions about your investments or the state of markets, we'd love to hear from you here at Thirty Mile Financial. Please feel free to schedule an introductory meeting using our simple scheduling application or via our contact page.