This post was first sent to my financial advisory clients on December 20, 2018, a month that delivered a sharp drop in stock values. A robust rebound in 2019 brought historically strong stock and bond returns, with U.S. large company stocks up 31.5%!

The ups and downs of the market, although not necessarily predictable, are inevitable. In just the last 10 years, we’ve witnessed long and peaceful upward climbs, as well as substantial market volatility, including days with some sizable drops. So, what’s the best approach for protecting your portfolio from the sometimes erratic and stress-inducing ups and downs of the market?

Why do Stocks Fall?

No one has an exact answer to this question. There are certainly a number of reasonable explanations: tariffs and trade wars, signs of a slowing economy, geopolitical concerns, uncertainty about the future, and the Federal Reserve raising interest rates. Sell-offs and plummeting stock prices are also not entirely surprising when such activity follows an upward bull run in stocks. Although bull runs can provide a positive portfolio push, no market rise comes without an eventual fall.

Why not Sell Before the Market Drops?

Over the course of my career, this has definitely been one of the questions I’ve heard most frequently. While we have, at times, pulled back from certain areas of the market (e.g., those areas that appear to be expensive or presenting unrewarded risk), we don’t “sell out” on a wholesale basis because we don’t think it works—at least, not in any consistent, repeatable process. I am not aware of any investor, professional or amateur, who has consistently sold out ahead of or during bear market drops and then successfully bought back in at the right time to capture market rebounds, let alone repeated the process every few years during subsequent drops and recoveries. I’m convinced that good portfolio management is process driven and not subject to moves based on “gut” or intuition.

The Market is Dropping: What’s Your Move?

So, what do you do when the market is falling? Don’t panic.

Your big picture financial strategy should be designed for long-term success, which means you need stocks and your portfolio to increase over time, not over night. Stocks do not need to increase every year—all the time—for your portfolio strategy to work. This is the strategy I use with my clients’ portfolios. We put our clients’ portfolios in a position for long-term financial success. This financial strategy does not require us to try and time the market and make large moves in and out of stocks or substantially reduce investments during bear markets because we know that such an approach rarely works.

Keep Calm and Carry On

It is key to understand and accept that the market will regularly experience poor performance years, as well as good years, and the volatility is the price to be paid for the high long-term return stocks offer. While you don’t have to try and be smarter than the market and out think it, you do need to remain persistently calm in the face of market and media panic. Exercising resolve and sticking with your investment plan will allow you to reap its long-term benefits.

Financial Preparation for a Recession: Issues to Consider

The charts below detail additional financial issues to consider during a recession (click images to enlarge). If you have questions about your finances and how a recession may affect your financial future, please feel free to contact me to discuss your options.

A History of Ups and Downs

When the media panics and works to make you believe the market is in serious trouble, remember the stock market has a long and sordid history of making investors’ blood pressure rise to new heights. For example:

1987: Stocks were down 34% at their lowest point, including “Black Monday” when the market experienced its worst ever one-day drop of 22.6%
2000-2002: combining the “Tech Wreck,” 9/11, and Enron, stocks were down 49% at their worst during this long and painful bear market
2008: The global financial crisis, toxic assets, bank failures, frozen markets, and congressional bailouts caused stocks to fall 57%

While each of these crashes was punishing and each was tipped off by unique circumstances, they all share one common trait: stocks recovered and rose to new highs. 2018 was the 10-year anniversary of the apocalyptic 2008 global financial crisis, and the S&P 500 marked a 330% gain since the depths of that crisis—a phenomenal recovery!

If you want more information about the history of the market, check out this chart. It’s loaded with market information and shows the powerful upward growth of stocks and investments over time through recessions, bear markets, and global crises.

What About MY Portfolio?

Many people worry that they don’t have enough time to wait for a market recovery. This is where the financial planning side of my work comes into play. Exhaustive academic studies have been conducted on how much money can be taken out of a diversified, well-managed portfolio over time—through up and down markets—and still have the portfolio last and grow for decades. I’ve given presentations on updated research on retirement portfolio distributions after conducting a deep dive into this material, and I am confident our clients are on track and well prepared for market downturns because of the steps we have taken to prepare them for long-term financial success. Money can be taken out of portfolios during down market years, while allowing the bulk of the portfolio to continue to recover and grow. We’ve worked to ensure that our clients are aware of these bear market stress-tested portfolio withdrawal strategies and are living within their guidelines.

Questions About Your Portfolio?

Having worked for years with clients at all stages of the financial planning spectrum, through surging bull markets and crushing bear markets, I’m confident we are well-prepared for whatever may lie ahead. Actually, I’m more than confident—I’m greatly optimistic!

Let me know if you would like to discuss your financial portfolio strategy or have any questions about how you can best prepare for changes in the stock market. We are always happy to discuss any thoughts or concerns you may have about your portfolio!