What should I do during a down market?

How to mitigate stock market volatility by sticking to your long term goals.

By Derek Wolf, Founder | Senior Field Specialist

Last updated: August 2, 2022 | Article published: August 2, 2022

A question that has been getting more and more prominent as we come to the end of the year. Having opposing views and ideas all at once can become overwhelming, even more so when they coexist in different timeframes. To avoid this is a well known secret that can help alleviate the unnecessary stresses and that is to focus on your long term financial plan, while avoiding making mistakes in the short term run by losing focus to the end goal.

Acting out in emotions in the short term can have long term consequences. These mistakes can be costly as acting impulsively or emotionally based off market volatility can have a major impact on your portfolio. Common mistakes that individuals make during market volatility is the changing of your rebalancing strategy during a bearish (decline of 20% or more of a major stock market index) market.

So what does it mean to rebalance a portfolio.

Strategic allocations of funds are based upon the individual’s needs and goals. Asset classes and different market sectors perform independently from each other. So over time, there will be some that rise above and some will fall. So depending on your portfolio allocations, some will become “overweighted” while the others remain “underweight.” So rather if their is too much of just one fund or not enough, the portfolio becomes at risk or underperforms. When this happens, it is beneficial to rebalance the funds. This is down by trimming back the outperforming funds and then reinvesting them into the funds into the underperforming allocations.

Now anyone can rebalance a portfolio. There are robo-advisors and online software that does it for you. What matters is how you balance it.

So when should you rebalance your portfolio?

You should always rebalance your portfolio anytime your allocations do not align with your original balancing strategy. When you rebalance you are essentially seeking to sell high and by low. Taking this approach, by sticking to your strategy, will help eliminate decision making based upon emotions. This will help you maintain your portfolio by reducing volatility and investment risk within it.

*Investing strategies, such as asset allocation, diversification or rebalancing, do not ensure or guarantee better performance and cannot eliminate the risk of investment losses. All investments have inherent risks, including loss of principal. There are no guarantees that a portfolio employing these or any other strategy will outperform a portfolio that does not engage in such strategies. Past performance does not guarantee future results.