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With the S&P 500 still hovering around bear market territory, it’s no surprise that many investors feel a sense of anxiety around their portfolios. That same anxiety can make you want to act, commonly by selling or rearranging investments in times of market turmoil.
While the feeling of “doing something” can temporarily calm your nerves in the short run, disturbing your portfolio is probably not the best course of action if you’re after long-term success.
Let’s go through three smart behaviors for handling your stocks during market declines.
1. Do nothing
In all likelihood, this is the best approach. But it also requires the most discipline. Remember that you’ve only officially lost money when you sell, so all of the unrealized losses in your portfolio are only theoretical until you choose to act. If you can avoid selling shares at a loss, you’ll be well positioned to take advantage of positive returns when the market finally recovers.
In pursuit of doing nothing, you might want to consider removing investing apps from your phone and making your portfolio less “watchable” in general. The more you refresh the falling numbers, the more you’ll want to do something to stop the paper losses.
While unusually difficult, it’s a far better idea to focus on the things you can control, like boosting your income, firming up a broad financial plan, and picking an investment strategy you can truly commit to.
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2. Rebalance into stocks
In reality, you’re likely far better off buying into a bear market than you are selling into one. If you have a typical portfolio containing both stocks and bonds, it’s reasonable to assume that the portfolio is relatively bond-heavy compared to where it was earlier in the year.
In other words, imagine you began the year with an asset allocation of 80% stocks and 20% bonds. Given steep stock losses, it’s entirely possible that you’re now working with a 70% stock and 30% bond portfolio. Since stocks have performed poorly relative to bonds, it’s a good time to rebalance back into stocks to bring your asset allocation back into line.
This is one management strategy that lines up your portfolio risk with your predetermined asset allocation.
3. Be a buyer in general
If you’ve created a sensible financial plan and have an established cash reserve (sometimes called an emergency fund), you can look at this bear market as a buying opportunity. With enough cash available, it’s overwhelmingly likely that buying stocks with an average 20% discount is going to look favorable in a decade or two.
But this psychology can feel counterintuitive. As one of the great investors of our time, Warren Buffett, has said: “Be fearful when others are greedy, and greedy when others are fearful.” With investor sentiment in the doldrums, now is the time to load up on cheap stocks and maintain an eye for the future, even when emotions dictate otherwise.
Bear markets are opportunities when viewed in hindsight, so be sure to take advantage of this one.
Maintain discipline and prosper
As tempting as it is to “go to cash” and liquidate everything, it makes even more sense to take the opposite approach. The bull market of the 2010s was destined to end at some point, and that moment has arrived. But it’s not all bad news: As with any turbulent moment, there is often a silver lining or two.
Use this time as a stress test: Are you taking too much market risk? If so, perhaps this calls for a change to your overall asset allocation. Regardless, steep declines in stock prices are prime opportunities to rebalance into stocks and even add bigger stock positions if you can find the right value.
As always, before taking any investment action, consider all of your options and their associated pros and cons.
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