What to Do About a Market Meltdown: Part Two

Opportunities Abound

Amid the current economic climate, opportunities abound for investors to bolster their retirement investments. Virtually every day, the financial news is all about the market’s recent volatility and the likelihood of a recession. As usual, all of this negative news is causing some people to make bad investment decisions based purely on emotion. When stock prices are declining, many people make emotional decisions based on fear and begin to liquidate their investments. As you know from reading my book, this is the exact opposite of what many people should do during a recession or market decline. While you should always construct your portfolio based on a rational investment process as described in Chapter 4, a recessionary environment could present an opportunity to increase contributions to your 401k plan and to your taxable investments as well.

If you are investing for retirement, the following steps will help you keep market declines in perspective and potentially help to accelerate the growth of your portfolio when the market recovers:

Reassess Your Goals and Your Risk Tolerance

A recession or market decline provides an opportunity to reevaluate your current investment strategy in relation to your objectives and personal risk tolerance. There is no one particular investment portfolio that is appropriate for all individual investors. The optimal portfolio will depend on the amount and timing of your cash flow needs, tax considerations and market conditions. If you feel there has been a change in your personal objectives or a change in your ability to tolerate risk due to what is going on in the economy, you should reassess the level of risk in your portfolio and reallocate your investments as needed.

Evaluate Your Diversification

You’ll want to make sure your portfolio is well diversified based on your time horizon and risk profile adjusting your holdings as asset values change in order to maintain the desired allocation between stocks, bonds and cash. Depending on your time horizon, a market decline may provide an opportunity for you to increase your holdings. If you are currently investing for retirement by making regular contributions to your 401k plan, a market decline may present an opportunity for you to purchase more shares of the underlying assets at lower prices.

Remain Focused on Your Long-Term Plan

When investing for the long-term, you should not overreact to a short-term market decline. Instead, you should remain disciplined and look at your investment portfolio in the context of your overall financial plan. When the economic climate looks gloomy, many people will succumb to what they hear and read in the media by liquidating their investments. This opens up opportunities for knowledgeable investors. Rather than avoid the market, smart investors - with the patience and commitment to remain invested through the volatile weeks or months - will be rewarded when the market recovers.

By remaining disciplined amid market turbulence, you may benefit from significantly higher average annual total returns when the market recovers. Investors who remain invested avoid the potential penalty of missing the best days when the market advances the most. Although we can never be sure when the economy and the market will recover after a short-term decline or recession, sometimes a recovery can be dramatic. Do you know what the average gains were in each of the two previous recessions 12 months following the market bottom?