Wow, what a ride last week. Unfortunately, things are not going to get better any time soon. So, now is the time to have a plan. Here are three things you should do to survive a significant market correction:
Do not panic. Making decisions in the heat of the moment is always a bad idea. Think about the market after 9/11. The Dow Jones Industrial Average decreased by 2,000 points almost immediately, resulting in a significant downturn that lasted about three months. It bounced around for a short period only to return to its pre-9/11 numbers within three months. Therefore, rash decisions can be calamitous when a market is so unpredictable.
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Get your financial house in order. The Dow dropping 600 points in one day is enough to scare anyone. But if you have a financial plan, you'll know where you stand. You will also know what that market change means to your situation instead of just thinking the worst. Remember, knowledge is power.
Consider the downturn of 2008 when the Dow made one- and two-hundred point changes almost daily. I look back to those times and remember talking to a number of clients who were extremely worried about the market. But since we had a financial plan for all of our clients, it was easy to show them the exact impact through their plan. It typically turned out that they were in good shape.
My guess is that most people are not in financial dire straights after last week. Most simply do not know where they stand. Putting together a financial plan that looks at net worth, cash flow, retirement, education funding (if you have kids), and even life insurance is the key to your comfort.
Have an investment management plan. Thinking through what you'll do if the market has significant swings can help you get through a period of uncertainty. We have significant diversity among asset classes that do not rely too heavily on any one area of the market. This helps our portfolio weather the storm of a downturn.
For example, several investments in our portfolios have responded quite well to the markets of the last few weeks. We use these investments to keep risk levels low. Things that have done well in this market include managed futures, absolute return funds, and quantitative analysis funds. These alternative investment strategies do not participate in the typical market gyrations, and can significantly lower the overall risk of your portfolio. You need to know about them and have them in your investment management plan.
These are just a few things you can do to be ready for the next round of storms, instead of just sitting around watching your portfolio drop. But, be prepared to think a little differently and not follow the herd.
Good luck and happy investing.
Kelly Campbell, CFP® and Accredited Investment Fiduciary, is founder of Campbell Wealth Management, a Registered Investment Advisor in Alexandria, Va. Campbell is also the author of Fire Your Broker, a controversial look at the broker industry written as an empathetic response to the trials and tribulations many investors have faced as the stock market cratered and their advisers abandoned their responsibilities to help them weather the storm.