Many investors are nervous. Even when you understand that unpredictable ups and downs are a persistent feature of the market, volatility like this can make it seem like the sky is falling. Especially when markets are down and prices are rising, however, it’s critical to act out of reason rather than fear. If you sell an asset as its value plummets, you can easily end up in a worse position than if you’d done nothing at all.
So, what should you do during a market downturn? While the details will depend on your portfolio and your particular objectives, the overarching advice is the same for everyone: Maintain focus on your financial goals. Having a well planned, research-backed investment strategy will help you stay on track throughout the market’s inevitable ups and downs. Follow these tips to navigate stormy market conditions with confidence:
Remember that the economy is cyclical
Inflation—and the prospect that the Fed will raise interest rates in response—tends to worry investors. However, inflation is often an indication that the economy is growing. It’s true that the global supply chain backlog is contributing to the current inflationary cycle; however, with global inventories up and backlogs down, there are signs that this problem is abating. With supply chains flowing more freely and inflation dampening demand, the stage is set for an upcoming anti-inflationary period.
It’s not uncommon for stock prices to fall 20% or even 30% from a peak. As you can see by the chart below, each time this happens, the sharp declines tend to be followed by robust rebounds. Bull markets have historically lasted longer and generated gains several times larger than the losses suffered during the bear markets that preceded them.
Prioritize value stocks
When you’re searching for companies or funds to invest in, keep an eye out for value. Value stocks are those whose share price is lower than others with similar intrinsic value, as indicated by fundamentals such as the company’s assets, revenue, earnings, etc. Warren Buffet has built an empire using this strategy. Nobel prize-winning research suggests that value stocks outperform the market as a whole over time. A fiduciary investment advisor can help you identify value exposure in the current market.
Invest in profitable companies
When a company has a healthy profit margin, it’s more likely to experience consistently rising share prices. This doesn’t necessarily mean you should sell shares in promising companies that aren’t yet consistently profitable. Selling them when they’re down just locks in your losses. It does mean that when seeking new investments, profitable companies have an edge over long periods of time.
Don’t overlook small-cap stocks
Small-cap companies represent the smallest 8% of the market. While large-cap stocks provide stability, using a mix of small- and large-cap stocks gives you the best of both worlds, allowing you to you take advantage of some of the higher growth that smaller companies often deliver while enjoying the stability of investing in large companies.
Market volatility often causes the proportions of equities and bonds in a portfolio to shift. A long-term investment plan will include targets for these proportions, which are adjusted over time as retirement or other events that require withdrawals from the investment account approach. Keeping focus on your goals includes maintaining the right balance in your investment portfolio.
Consider exercising stock options
If you own employee stock options in a publicly traded company, a market downturn could provide a good opportunity to exercise. Since taxability is often tied to the bargain element of the transaction, a lower market value often means less tax liability at exercise. Be sure to work with a professional who has the tax and investment expertise to devise tax-efficient investment strategies when planning your employee stock purchase.
Sometimes, selling stocks at a loss makes sense. By claiming the tax loss and immediately redeploying the proceeds into a different investment, you can maintain market exposure for the future while reaping the tax rewards today. Work with an investment advisor who has the tax expertise necessary to facilitate tax loss harvesting and other important tax planning strategies.
During tough economic times, it’s more important than ever to take a disciplined approach to investing. WRP provides complete wealth management services with a focus on serving pre- and post-IPO employees. For more insight and tips, subscribe to our blog or browse our free resource library.