“10 Ways to Better Prepare for a Market Downturn”

One of my roles as an advisor is to temper client expectations regarding returns and volatility of the equity markets—especially during difficult moments. Because the media and financial journals love to sensationalize things we can easily fall prey to abandoning our long term plans. During stressful moments one can lose sight of long range goals, especially if we lack the assistance of a professional.

When things were horrible, like they were in 2008 and early in 2009, my role was to help individuals have a more reasonable expectation about the financial markets. Every day I had to remind clients that the sky was not falling and that our financial system was not collapsing.

The opposite is true when stocks are rising like they are now. My role during these times is to temper client expectations in light of potential exuberance or undue euphoria. You see, in rising markets we tend to see things as rosier than they actually are. Consequently, our appetite for taking on additional risk increases.

My role during these times is to remind clients that markets don’t rise precipitously and to prepare them for a market correction should one occur. I am not suggesting a timing mechanism, but rather using a simple rationale. Heightened market volatility is to be expected after the unprecedented run we have had in equity prices. All too often markets get way ahead of themselves in both directions—extending gains and going much lower than we anticipate.

So, having said all this, here are some practical ideas to better prepare you for the next market pullback:

1.      Make sure you are in the right asset mix. When things are going up everyone loves it. This is the single best indicator I have found to determine if a person is in the right asset mix (stock/bond). Unfortunately, the indicator works best when the market is decreasing. 

2.      Re-balance if you are not already doing so.

3.      Trim some of your gains. This happens automatically if you are rebalancing every year. However, you may want to consider reducing your exposure to stocks after a significant gain.

4.       Be broadly diversified. While this doesn’t save you from market fluctuation, it can protect you.

5.       Reduce portfolio expenses.

6.       Minimize taxes and turnover.

7.       Think long-term.

8.       Apply discipline.

9.       Hold low-cost funds.

10.     Maintain asset allocation.

I hope this was helpful. For a further discussion on this topic please contact our firm.

Mario Yngerto