Maybe it's the old photos of people standing in soup lines during the Great Depression, or perhaps we're still dealing with what it was like to see bare grocery-store shelves early in the COVID-19 pandemic. Whatever the reason, a lot of Americans are nervous about their finances -- specifically, what will happen to their retirement accounts.
The truth is this: The markets will surge, and they will fall. It's part of the economic cycle. Here, let's focus on what you should do when the market appears to be in free fall and the balance of your retirement account drops like a stone.
Image source: Getty Images.
1. Don't let your emotions take over
If someone ever tells you that they thrived during the Great Recession of 2007 to 2009 because they were smart enough to take their money out of the market before it crashed, remember that they were lucky. Timing the market rarely works out, and the investors who end up with the fattest portfolios tend to be strategic rather than emotional.
The markets will go up, and the markets will go down. Both are a normal part of the economic cycle. Reacting like your hair is on fire will only make you a nervous wreck and lead you to make less-than-wise decisions.
Selling when the market is down means you're likely to miss the sweet benefits associated with recovery.
2. Diversify
As the market tumbles, some pretty unsexy stocks become stars. For example, consumers will always need electricity, water, toilet paper, laundry detergent, prescription medication, and trips to the doctor. In other words, utilities, consumer staples, and healthcare stocks can be great place to look for ways to defend your portfolio, and add diversification. And what better time to buy those staples than when others are panic-selling?
3. Rebalance
At some point, you realize the value of rebalancing. You rebalance your diet to eat foods that better meet your needs, and you rebalance the people you hang out with to surround yourself with friends who are good for you. Rebalancing is a positive thing. And when the markets drop, it's a good time to look at your portfolio and check on how well things are balanced.
For example, your portfolio can get out of whack when your stocks grow faster than bonds (or vice versa) and you no longer have an allocation that benefits your long-term plan. Take this opportunity to get everything in line.
4. Take advantage of the situation
We know that a market cycle is measured from its highest point to its lowest point, and when the market drops 20% from its most recent high, it's considered a bear market. This is the point at which some consumers will begin dumping stock.
Guess what happens to that dumped stock? You (or your broker) will look around and begin scooping up the good stuff at a bargain price. These sell-offs can create the opportunity to purchase stocks that might have been overvalued, or stocks that are poised to take off like a rocket.
5. Stay the course
Historically, the average length of a bear market has been 289 days (a little over nine and a half months). On the other hand, the average bull market has lasted 965 days (2.6 years). Once you've rebalanced your portfolio, picked up stocks at a bargain price, and continued to invest regularly (even as others are pulling out), your portfolio has the potential to grow dramatically as the market recovers.
That's potential you could have missed out on by abandoning the market when things started going south.
The Hartford Fund says it beautifully: "Even elite athletes need rest days to stay healthy. Sometimes, financial markets need to reset from record-setting performance, too."
