For those of us who have ever lived through housing market crashes, stock market plummets, and full-on recessions, we know that downturns in the market can be downright scary. Foreclosed homes, filings for bankruptcy, retirement dreams cut short, and fear of the unknown are just a few examples of what can happen if someone is not prepared for less-than-ideal economic conditions.
The good news is that there are things you can do to protect yourself from the worst-case scenarios should the need arise. It all comes down to making preparations and taking action by keeping these four things in mind.
Keep An Eye On Your Emotions
One of the most important rules in investing is to refrain from making emotional decisions. Multiple studies have analyzed how our emotions affect our investing results, especially when we chase above-average returns. A 2018 DALBAR study revealed that investors’ decisions were the biggest reason for underperformance. (1) Simply put, behavioral biases lead to poor investment decision-making.
It’s easy to get swept away emotionally when the market negatively wreaks havoc on your finances. But if you stay true to your investment strategy and avoid making decisions when emotions are running high, you are more likely to protect yourself from losing even more. For example, rash decisions may protect the downside in the short-term, but this behavior can also forfeit returns when the market rebounds, causing more losses. If you take the time to create a disciplined financial plan and rebalance your portfolio regularly, you are doing your part to prepare. Your number-one priority is to protect your principal, so don’t take unnecessary risks with your investments when the market is struggling.
Don’t Put All Your Eggs In One Basket
We’ve all heard about the importance of diversification when it comes to maximizing our investments. But as you get closer to retirement, it’s even more important to make sure you are investing in the right mixture of holdings. This is the time to reduce your risk and ensure that you have the right asset allocation. In this way, you can minimize the impact that any one losing investment can have on your overall portfolio performance.
Rebalancing is also a key factor in keeping your portfolio safe. It’s not enough to create proper diversification and just walk away. You need to regularly analyze your portfolio to ensure that it still reflects your appropriate level of risk and that you haven’t become too overweighted in any one asset category.
Create A Cushion
This strategy is all about being conservative. While cash investments may not provide a lot of growth, having a cash contingency fund with at least six to twelve months’ worth of living expenses will protect you against having to sell investments at low values to free up cash. Examine spending patterns and find ways to invest even more into cash or cash equivalents, such as money market accounts, certificates of deposits, or short-term Treasury bills.
Work With Your Advisor
The only long-term guarantee in investing is that there will be short-term fluctuations. We’ll experience bear and bull markets in the decades ahead just as we have in the past decades. Rather than fear change, focus on preparing for it and enlist a financial professional to walk you through it.
By helping you adhere to a disciplined approach, focus on the long-term, and understand your investing behavior, financial advisors bring untold value to the table in terms of risk management and investment allocation. No matter what the market does, working with an advisor can help you keep your retirement plan on track and moving toward your financial goals. At Cornerstone Capital Advisors, our goal is to help secure your future. Call us at (330) 896-6250 or email [email protected] to set up a complimentary consultation so we can discuss how to protect your finances from loss, even when the market experiences a downturn.
About Cornerstone Capital Advisors
Cornerstone Capital Advisors is an SEC registered, fee-only investment advisory firm that assists individuals in financial planning, investment planning, retirement, and wealth management services. Our team of dedicated financial advisors are committed to understanding your unique situation to develop a wealth management strategy that covers all areas of your financial situation, not just investments. Learn more by visiting our website at www.ccadvisors.com.
All information contained herein is for informational purposes and should not be construed as investment advice. It does not constitute an offer, solicitation or recommendation to purchase any security. Past performance does not guarantee future results. These views are as of the date of this publication and are subject to change.