We often speak with clients who feel anxious about market corrections. This common concern can become a source of stress for many investors.
As if additional stress wasn't enough, worries about market volatility can actually derail your financial strategies, if you let your emotions get the best of you. Unfortunately, misinformation promoted by the financial media and Wall Street is designed to elicit an emotional reaction from investors -- and make unscrupulous investment professionals more money.
These investing guidelines will help you weather a potential market correction and keep your worries in check.
Review Your Investments with Your Financial Advisor
Savvy investors know that a passive approach is most efficient -- and effective -- and hold a globally diversified portfolio of assets allocated in a fashion that best suits their personal level of risk tolerance. In other words, they're evidence-based investors.
It's easy to identify an evidence-based investor, as they recognize that active management practices like stock picking, market timing, and various other attempts to "beat the market" are, as the overwhelming quantitative evidence shows, just not as effective as long-term, passive investment strategies.
To ensure that your investments are evidence-based, sit down with your trusted advisor to review your portfolio.
Asset Management Solutions: Asset Allocation is Key
Though no one can predict market movements with any accuracy, one thing has historically been true: the market may fluctuate day-by-day but, over time, it has continued to rebound. Diversified allocation of assets is key. If your assets are properly allocated and diversified between asset classes you will be in a better position to withstand inevitable market corrections.
For instance, if you've allocated half of your assets to stocks and half to bonds and the market takes a downturn, your stocks may lose value, but your bonds may maintain their value. If this should happen, over time, your stocks may recover their value as the market rebounds and, in the meantime, you may sell your bonds if you experience the financial need.
Financial Strategies: The Difference Between Realized and Unrealized Loss
Another key issue to keep in mind is the difference between realized and unrealized loss. A realized loss is the difference between the price you paid for a stock when you bought it, and the price you received for it when you sold it.
In contrast, an unrealized loss is simply a "paper" loss, as it's the difference between the price you paid when you purchased the stock and its current value. If you panic during a correction and sell, you will miss out on the potential gains of a recovery and incur a realized loss. However, remaining committed to your holistic financial plan and retaining your stocks is the wealth planning path we recommend during periods of market turbulence.
Investment professionals who play on your fears and emotions and encourage you to sell during a correction will profit from the fees and commissions that these actions generate.
Remember, no one can predict the future, regardless of what the talking heads in the financial media would have you believe. No matter how credentialed, experienced or confident the so-called "experts" appear, there's absolutely no empirical evidence to prove that any one financial "guru" can accurately predict how the market will move. Rather than reacting emotionally to the news, hold onto your long-term financial strategies and financial peace of mind.