Image source: Mark Rain via Flickr.
After years of watching the stock market make an almost uninterrupted climb to all-time record highs, millions of investors are in a near-panic about what's happened with stocks over the past six months. As of yesterday, the Dow Jones Industrials (^DJI +1.79%) and the S&P 500 (^GSPC +1.20%) were both off 15% from their all-time highs. Fears of a seemingly imminent stock market crash might have you wondering what you should do with your money. Before you make an impulsive decision that you'll regret later, read on to learn what you can do to navigate market turbulence successfully.
Put it in perspective
The decline that the Dow and S&P 500 have suffered in recent months has been painful, but it hasn't come close to wiping out the huge gains that the stock market has earned for investors since the financial crisis. Even after the drop, those who invested in the S&P 500 through the SPDR S&P 500 ETF (SPY +1.22%) are sitting on annualized returns of 14% per year over the past seven years.
Most investors would've jumped at the chance to earn those returns if they could have predicted it back in 2009. So don't let the fact that your average annualized returns before the drop were closer to 16% make you feel negative about the downturn.
Start taking notes
The key to a successful investing plan is that it be realistic, and you have to be comfortable with your plan for it to work. To gauge your true risk tolerance, you have to go through actual risky situations. But it's easy to forget how you felt during a market crash.
Making a written record of your actual reactions to changing market conditions can help you for the rest of your investing career. Even if you succumb to panic once, recording that mistake and its consequences can help you avoid making the same poor decision again. Moreover, you can tailor your portfolio in the future to avoid tough situations before they happen again.
Make a wish list
Perhaps the best thing about a stock market crash is that if you're looking to buy stocks, everything goes on sale at the same time. Typically, the panic in the market sends stocks down indiscriminately, and you can cash in if you have a shopping list already prepared.
For some investors, just committing more money to the stocks or funds they already own after a crash is the best way to take advantage. For others, it's a great chance to look at new stocks that might have been too expensive before. Either way, a wish list makes you look at the positive side of stock market crashes and the huge growth opportunities that they bring.
Protect yourself
If you're retired, you don't have regular job income to help you weather stock market storms. Having enough money in short-term investments to cover a few years of living expenses is crucial to avoid having to sell stocks at a low point for the market.
If you don't have that cushion, take a hard look at your investment portfolio to see if there are positions you can trim now. The timing won't be ideal, but it could make you feel a lot better if the stock market declines further from here.
Rebalance
Many investors haven't touched their portfolios in years, and their exposure to stocks could be higher than they think. In past market crashes, those who took a hands-off approach were surprised at how big their losses were, because their stock allocation was heavier than they'd intended.
Rebalancing your portfolio regularly can help avoid that problem. You don't need to rebalance too often, but doing so every year or two at least helps you keep your risk levels in line with where you want them.
Get help if you need it
Some investors find that they don't have the temperament to handle their investments on their own. There's nothing shameful about that, and it's smart to know yourself well enough to see that emotional responses will end up costing you money.
In those situations, turning to a trusted wealth manager or financial planner can help give you the discipline you need. A wealth manager can take the responsibility for making smart, opportunistic money moves out of your hands, while a financial planner can hold your hand and help you stick to the plan while keeping you from doing things you'd regret later. If you can find a reputable wealth manager or financial planner to help you, it can make a huge difference.
Down markets are always scary, but if you have the right plan in place, you can not only get through stock market crashes but also benefit from them in the long run. All it takes is some preparation, the right attitude, and the discipline to follow through.
