How to Respond to a Rough Market

Blog - 7 - 01 - 16

It’s easy to stick with an investment plan when the market is going straight up. It’s harder in a difficult market like the current one—but no less important.

The stock market has certainly seen dramatic swings in the past few weeks. And that’s on top of a 2015 in which virtually no asset class made money. Under such conditions, certain investors start itching to make a change. But it’s moments like these that can separate the successful investors from the rest.

One of investors’ main stumbling blocks is a perspective that is too short. At Steel Peak, we advise clients that they should only invest money in the stock market if they won’t need it for at least five years. That’s the length of time required for a complete market cycle to unfold.

In the short term—a year, two or even three—stocks can, and often do, lose value. But over the long term, the probability of loss drops significantly, and the likelihood of meeting your investment goals grows.

Evaluating your investments over an artificially short timeframe can lead to make decisions that undermine your investing success. A classic one is selling low and then buying high: There is no better way to create a downward spiral and put your financial goals in jeopardy.

Feeling a bit anxious in rough markets is natural. But not even the smartest investor can predict or control the direction of stocks or bonds. The key is to control what you can. And first and foremost, that means resisting the temptation to sell. Doing so can permanently lock in losses, increase risk by upsetting your asset allocation, and trigger taxes.

Another factor within your control is rebalancing. Changes in the market can skew your original asset allocation; regular rebalancing gets you back to your target allocation. Rebalancing helps to control risk over the long-term so that your money can compound and grow more efficiently.

For many investors, it’s helpful to revisit the financial plan underlying their investment portfolio. A review of the long-term roadmap can help to restore perspective and provide reassurance. In some cases, investors end up re-evaluating their original risk tolerance. In such cases, your advisor will gradually adjust your portfolio to reflect that new risk target. The ultimate goal: To ease any worries so that you’ll be able to stay the course in both up and down markets.

Don’t hesitate to contact us if you’d like to discuss the markets and your portfolio.