Market Downturns Are Unavoidable: What You Can Do to Make the Most of This One
The U.S. stock market has been on a volatile ride in recent weeks amid a selloff in big-name technology stocks and rising concerns about the health of the U.S. economy. Major indexes finished sharply lower on Friday, with the S&P 500 posting a loss for the third consecutive week, its longest losing streak since April.
While a look at the headlines in financial news or a peek at your brokerage account could inspire panic, here’s what experts recommend you do instead to make the most of this downtrend.
Buy and Rebalance, Avoid Panic-Selling
Chris Mankoff, a CFP and Partner at JTL Wealth Partners, has had clients calling and asking him about what they should do about the recent drawdown. He strongly discourages retirees or pre-retirees from panic-selling in this environment, as doing so might mean missing out on returns down the line.
“Be prepared to have these pullbacks and corrections. They’re normal,” said Mankoff. “Let’s use this as a buying opportunity. If it’s one of those deals where we keep dropping, [then] we’ll keep dollar-cost averaging into it.”
With dollar-cost averaging, when you buy small amounts of a stock as the price is falling, over time your investment cost per share reduces, improving chances of a bigger profit when the stock rebounds.
Sticking to your long-term investment plan doesn’t mean doing nothing during big market swings. Carolyn McClanahan, a CFP and founder of Life Planning Partners, suggests using this as an opportunity to rebalance portfolios.
“For example, their investment policy may state they will be in a portfolio of 60% stocks and 40% bonds. If the market drops a lot, they should rebalance the portfolio to get them back in line with their invested policy,” said McClanahan.
Options To Consider
With the prospect of the Federal Reserve cutting interest rates in September, Greg Corneille, CFP and Principal at Choice Wealth Management, recommends investing in Treasurys or Treasury ETFs. Bond prices move in the opposite direction of bond yields. The Fed’s anti-inflation rate hikes over the past two years pushed bond yields higher, bringing down bond prices and returns for bond funds.
Another asset class that tends to benefit from rate cuts is small-cap companies, which offer a big upside but can also prove to be extremely volatile.
“Going into an interest rate environment where the Fed can start cutting rates, that tends to bode well for small-cap companies,” said Mankoff. “The ones that we look at are ones that are profitable, have positive cash flow and aren’t leveraged out their eyeballs.”
In conclusion, it’s important to remember that market downturns are a normal part of investing. Instead of panicking and selling, it’s best to stay calm and take advantage of buying opportunities. Dollar-cost averaging and portfolio rebalancing are good exercises for long-term investors during big market moves. Additionally, considering investing in fixed-income securities or small-cap companies can be beneficial ahead of the anticipated rate cuts by the Federal Reserve.
By following these strategies, investors can navigate through market downturns and position themselves for potential future gains. It’s important to stay focused on long-term goals and not let short-term market fluctuations derail your investment strategy. Remember, investing is a marathon, not a sprint.
