Strategies During Market Volatility and Downward Movement
Market corrections and volatility can offer opportunities to reinforce your long-term investment strategy.
Many investors are experiencing anxiety caused by the recent volatility and downward trends of 2022.
Reminder: Market cycles are an expected part of a long-term investing strategy and are accounted for when building a portfolio. The Total Stock Market Index generated a return of 98.9% during a three-year period through December 2021. For investors, the length and returns of this last bull market must remain in your thoughts as we enter a new (and not unexpected) phase of the investing cycle. These historical gains are one catalyst for a market correction (and also for the Federal Reserve’s decision to adopt a more restrictive monetary policy).
Strategies to Consider During this Period:
Rebalance current holdings, bringing your allocation back into alignment. The last few years may have made rebalancing too costly as the gains in your portfolio made selling positions tax-prohibitive. Additionally, your portfolio may be out of balance due to the strong growth in the equities sector. Now is a good time to evaluate what allocation you are targeting and shift your investments accordingly.
Implement a tax-loss harvesting strategy. If there are positions in your portfolio you’ve wanted to eliminate, but did not want to pay taxes on any gains, this year may offer an opportunity to sell at a loss, enabling you to amass losses to offset capital gains this year or in the future.
Identify buying opportunities. If you have cash available for investing, likely this year will provide opportunities to invest in the marketplace as downward trends occur. (Unless there is a dramatic drop in the market, consider a dollar-cost averaging approach.)
Strategies To Avoid Now and Forever:
DO NOT use market volatility or corrections as an excuse to time the market. If market timing worked, all the “experts” would be sitting on their yachts instead of advising you on TV. Stay the course.
DO NOT shift into new asset classes or reevaluate your long-term allocation strategy based on short-term dips and trends. This is still market-timing and requires one to know when is best to shift in and out of asset classes.
DO NOT stop investing in the marketplace. Whether you are nervous it will further decline or you are waiting for a downward trend to “get a deal,” investor success relies on time in the market, NOT timing the market. If you are periodically investing through your work retirement plan or other method, continue this strategy.
Keep in Mind:
Market corrections are a natural part of the investment cycle. Historically, they are much shorter than bull markets. Most importantly, they are factored into your long-term historical returns, and so are anticipated when it comes to projecting your investment success.
It is likely that choppy market conditions will remain through much of 2022—historically until the mid-terms. As always, I urge you to buy and hold low-cost index funds and maintain your strategy throughout all market cycles.