What to Do in a Market Sell-Off

Market declines are a reality of investing. No one can avoid them all, unless you stay in cash all your life (which is still a money-losing strategy, if you consider the impact of inflation).

The throes of a market downturn can be emotionally taxing to investors, but a market corrections should not mean an invitation to panic. Experienced investors know how to mitigate emotional decision-making during market sell-offs with a measured, rational approach that rides-out temporary pullbacks.

First, creating and sticking with an investment plan can help investors weather the storm of a sell-off. When plans are constructed with care – accounting for present and future goals, risk tolerance, and other factors – investors tend to avoid making reactionary decisions with negative ramifications. If you’ve worked with an advisor to select an asset allocation that addresses your long-term objectives and your tolerance for risk, then just remember that your asset allocation also accounts for the natural ups-and-downs of investing. It comes with the territory.

Diversification provides a vital safeguard against negative market behavior. Stocks as an asset class have reliably delivered solid returns over time, but they’re also inherently volatile. Less volatile assets like bonds may not skyrocket in value, but their (generally speaking) low correlation to the stock market and their ability to post steady or slightly positive returns in down equity markets makes them a great way to hedge against losses and, consequently, an important part of any portfolio where risk tolerance is a factor.

Timing is crucial when investing, but that doesn’t mean trying to time the market when it’s in a volatile patch. Picking and choosing when to be active based on downturns can mean missing out on large gains. Data shows that every downturn on the S&P 500 of 15% or more since 1929 has resulted in a recovery – to the tune of a nearly 55% average return in the year following a decline. This means a real chance to profit for those brave enough to endure the down cycles.

While timing can lead to big gains, earnings are typically maximized by a patient, long-term approach. An impending bear market may seem catastrophic in the short term, but investors who can see beyond immediate events and maintain perspective are usually rewarded over time – after all, the S&P 500 had a mean return of 10.43% over 10-year periods from 1937 to 2014.

Even healthy markets have downturns, but corrections and new highs have consistently followed throughout history. Staying rational and focusing on a well-planned investment strategy means viewing sell-offs for what history indicates they are – a frustrating, but temporary, market behavior portending better things to come.

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