Ways to Survive a Market Downturn - SmartAsset

Current market volatility has many investors wondering how to minimize losses and find new opportunities. But whether you’re worrying over your IRA or alternative investments, there are several strategies you can implement to survive a market downturn. So, to navigate the current market conditions with ease, here are some ways to keep calm and invest on. A financial advisor can help you put together a financial plan that will keep you on the right path no matter the market conditions.

Adopt a Long-Term Investment Mindset and Strategy

A bear market is when the stock market dips by at least 20%. Of course, no one likes to see it happen, and if you’ve been investing for a while, seeing possibly hundreds of thousands of dollars that you’ve worked for over the past few decades disappear can be demoralizing. But rather than sinking into a panic, think about the long term.

In the past 100 years, we’ve experienced 14 bear markets. Despite these periodic struggles, the market has always rallied back and ultimately rewarded those who held on. So, when the market dives, reject the impulse to sell; this will only make your losses permanent. By keeping hold of your shares, you’ll see them rise again when the market turns.

It is challenging for a selection of investments to outperform stock market indices. Most money managers, whose job it is to maximize their clients’ returns, struggle to do this regularly. As a result, many investors put money into funds that follow an index such as the S&P 500 because the market overall will grow at a steady clip, even if there are bumps in the road.

What does that mean for you? While there is no sickening feeling quite like opening up your retirement account to see your investments decimated, it’s not necessarily the end – and every past recovery from a bear market demonstrates this. Historically speaking, over the long haul, bear markets eventually turn bullish and your holdings can regain and surpass their former value.

Avoid Impulsive Investing Decisions

Now that you see why it’s essential to look at the big picture during a market downturn, it should make more sense why it’s wise to avoid impulsive decisions. By fighting the urge to sell and holding steady, you’ll keep yourself from reaping maximum losses.

The longer you have until retirement, the more a steady hand will serve you in a bear market. Moves based on panic won’t grow your account the way more time in the market will. While market downturns seem like the end of the world, they are usually short-term compared to the generally upward performance of the stock market over time.

Evaluate Your Goals, Time Horizon and Risk Tolerance

Having money in the stock market is the means to an end for most people, not an end in itself. During a market downturn, it’s crucial to remind yourself of your financial goals. What are you investing for? How long before you need to start withdrawing cash from your investment account? Your goals, not a temporary market downturn, should inform the bulk of your decisions.

Therefore, it can be advantageous to sell and reposition when the market isn’t at its hottest. However, this decision isn’t emotional – it’s strategic. For example, if retirement is around the corner or your child is starting college soon, acquiring bonds instead of stocks can help preserve your hard-earned funds. Additionally, it can provide modest returns, even as you begin withdrawing from the account. While you may miss out on the higher growth potential of stocks, bonds are more likely to keep your account steady once you need the money.

From the time you begin investing until you retire, it’s vital to recognize your risk tolerance. When you invest according to your level of tolerance, you’ll experience less stress. Of course, your portfolio will fluctuate. But investing according to your own preferences instead of outside pressures like the habits of friends and family will help you stay calm head in the midst of a market downturn.

Stay Consistent

Because the market’s overall trajectory is upward, a market downturn is no reason to stop investing in the short term. By continuing to put the same amount of dollars into your investment account every two to four weeks as you typically would, you give yourself the opportunity to buy in when stock prices are lower and receive excellent returns during the market’s recovery. This framework for investing is known as dollar-cost averaging.

Diversify Your Portfolio

No matter where you are on the spectrum of risk tolerance, diversifying your portfolio will help protect your nest egg from market volatility. While a rising tide raises all ships, a few of them will inevitably sink when investing. Diversifying takes the sting out of assets that underperform or suffer during a market downturn.

Typical individual investment accounts contain stocks, real estate, a variety of currencies, commodities and bonds. The variety of assets in your account have different levels of risk and earning potential and will cover each other’s weaknesses, meaning your account can weather bear markets with less difficulty. In addition, coming out of a market downturn with your account’s value intact gives you increased ability to seek new investments and diversify even further.

The idea of rebalancing your portfolio goes hand in hand with acting according to your goals. For example, in a market downturn, exchanging volatile stocks for short-term instruments such as U.S. Treasury bills or certificates of deposit can provide you with lower, more reliable returns and more liquidity.

Identify Strategic Opportunities

During bear markets, many stock prices may fall, but the average consumer makes some of the same purchases as always. Therefore, investing in shares of consumer staples, companies that sell food, toilet paper, gasoline and dish soap, can lead to better results than buying shares of consumer discretionaries, companies that sell luxury goods.

Additionally, while it is challenging to beat the market in the long run, market downturns provide professional portfolio managers the opportunity to rise. Under normal market conditions, an index fund that follows the S&P 500 will provide robust returns over time. However, in periods of volatility, the expertise and depth of research provided by investment professionals can help you shore up losses and find gains while the overall market struggles to rise.

The Bottom Line

While a market downturn will most likely take a chunk out of your investment account, your response to a bear market is critical in keeping your investments going. Instead of panic-selling that results in further loss, you can adopt the long-term strategy and reallocate your assets based on your financial goals and timeline. Also, remember, the market has always rebounded from past downturns.

Tips for Investing

A financial advisor can help you make wise moves during a market downturn. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you’re looking for a way to see how your investments will grow given a certain rate of return, try SmartAsset’s investment calculator.