What Issues Should You Consider During a Market Correction?
- March 2, 2022
- By: Marcos Segrera, CFP®
Markets are in full correction mode. Reminder: A market correction is defined as a drop of at least 10% and a bear market is defined as a drop of 20% or more. The situation in Russia/Ukraine is and will continue to dominate headlines until resolution or something more eye-popping takes the stage. Depending on where you look, things can be even worse than the corrections and bear markets hinted at above. Just take a look at performance over the last year of what were some of the high-flying names of the recent past:
A system that was once awash with liquidity is now tightening and this is the result. Bitcoin and Crypto in general have also taken it on the chin as liquidity leaves the system. The case that these digital tokens/currencies/assets can act as a store of value will continue to be challenged as long as volatility is this high. How do you manage all of this? Unfortunately, you’ve heard this before - DIVERSIFICATION AND A PLAN; that is how. But like most universal truths, it is much easier said than done. Even harder still, is sticking to it when the stuff hits the fan.
So, volatility is here. What now? Assuming we can all agree that trying to time markets, although alluring, is a bad idea, here are a few things to consider if you feel you must act:
- Reexamine your cash flow. Are you going to be tight? Consider having a larger emergency fund.
- Have you invested dollars that you know for certain you will need within 5 years? Reconsider what dollars are meant for long-term investment and which should be kept in cash.
- Is retirement on the horizon? Revisit your plan with your advisor.
- Don’t have a plan? No time like the present to get on that.
- What is your portfolio allocation? Does it need to be revisited? If you’re intent on reducing overall portfolio risk because you’re losing sleep, consider swapping some percentage of stocks for bonds rather than hitting the “sell all” button and going entirely to cash.
- Is it time to rebalance your portfolio? Address this as part of your plan with your advisor.
These are just a few items to focus on. This checklist can also be helpful in uncovering ideas and issues to review.
Also, keep in mind 3 common mistakes investors make during market corrections and bear markets:
- Confusing your time horizon with someone else’s
- Failing to have a plan and failing to stick to that plan
- All financial plans should expect markets to fall along the way
- Trying to time/outsmart the market
Market volatility is not unexpected or uncommon but that doesn’t make it any more comfortable. We hear that. As long as we remain long-term optimists we can be confident that we will persevere.