By Greg Hart, CFP®
It’s coming. At least that’s what we keep hearing regarding the next recession. We’ve been fortunate enough to experience the longest bull market in U.S. history, but market fluctuations are a normal and expected part of the economic cycle, and it’s no surprise that things are starting to slow down. We’ve been through downturns before, and we’ll go through them again. The important question is: Will you be ready? Here are a few solid principles to help you prepare for the next market downturn, whenever it comes.
Take A Deep Breath
One of the most important rules in investing is to refrain from making short-term emotional decisions, especially near market tops and bottoms. Multiple studies have analyzed how our emotions affect our investing results, especially when we chase above-average returns, also known as “chasing the hot dot”. 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 sweeping decisions when emotions are running high, you won’t run the risk of losing even more. As long as you have created a disciplined financial plan and are adjusting your portfolio regularly, you are doing your part to prepare. Your number-one priority should be to protect your principal, so don’t gamble with your investments at times when the market is struggling.
Diversify Your Portfolio
You’ve heard it a thousand times, but that doesn’t make it any less important: Don’t put all your eggs in one basket. But as you get closer to retirement and face a downturn, it’s even more important to make sure you are investing in the right types of holdings. This means not only diversifying between stocks, bonds, and funds, but also among different sectors. 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 reliant on any one asset category.
Diversify Your Income
A comprehensive retirement plan involves more than simply making the right investments, it’s about doing everything possible to avoid dipping into your accounts prematurely. Economic downturns often go hand in hand with job instability. So, in addition to diversifying your investments, consider diversifying your income sources as well. Beside your salary, consider where other sources of income can and will be coming from. This might mean investing in rental real estate or other income producing investments such as higher yielding stocks and bonds, picking up a side job, starting your own small business, or making money online. The more diversified your income, the safer you’ll be.
Create An Emergency Fund
This strategy is all about preserving the wealth you’ve accumulated to this point. While cash investments may not provide a lot of growth, having a cash contingency fund with at least six months 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 tuck away even more into cash or cash equivalents, such as short-term bonds, certificates of deposits, or Treasury bills.
Make A Plan
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.
The best way to keep your portfolio safe is to have a solid financial plan in place, a plan designed by professional advisors trained in navigating through tough economic times. If you’re interested in creating a personalized plan that ensures your bases are covered, Haddon Wealth Management can help. Call us at (856) 888-1744 or contact us online to schedule a complimentary get-acquainted meeting.
Gregory M. Hart, CFP® is the founder and managing director of Haddon Wealth Management, LLC, a registered investment advisory firm that provides comprehensive wealth management (in-depth financial planning and sophisticated investment management) for clients who value a relationship-driven approach that delivers customized solutions. Based in Haddonfield, New Jersey, Greg works with clients throughout the Delaware Valley, as well as nationwide. To learn more, connect with Greg on LinkedIn, visit our website at www.haddonwealthmgt.com, or call (856) 888-1744 to begin a discussion.