Every so often we wake up to news reports of market volatility and global financial upheaval. Even though this is not unusual, we grow concerned and some investors panic as they watch their hard-earned money disappear before their eyes. In an attempt to preserve their wealth, investors will begin selling portions of their portfolio to hold in cash. If you are an investor, there is a huge probability that you will experience multiple market downturns in your life. The first question you may want to ask yourself is, “How am I going to react to the immediate news that the market is seemingly crashing?”
As the market tumbles in the wrong direction, you may have an emotional reaction, everyone does. However, making an emotional decision before thinking through your options could be detrimental to your financial strategy. When market mayhem is at an all-time high, consider taking a step back and asking yourself these five crucial questions:
1. How does this news impact my risk tolerance?
If you are an investor, particularly one that discusses your financial condition with a financial professional, you should already have a gauge on the amount of money you can afford to lose without it impacting you financially, also known as your risk tolerance. This is not a number written in stone. It is a ballpark range that may change depending on how you have saved, how aggressive you are as an investor, the diversification of your overall portfolio, how well you manage your budget, and many other factors. Understanding how well you can absorb a financial meltdown based on your own financial situation, strategy, and goals is key.
2. My family and friends are selling; what should I do?
What you shouldn’t do is get caught up in what your family and friends are doing. Only you can know how much risk you can handle. Maybe you haven’t saved enough for an emergency fund, and you aren’t liquid enough. Perhaps you have been too speculative with your investments or put too many eggs in one basket and are reacting out of fear and anxiety.
There are steps you can take to help spread out and mitigate some of the risk, but you also want to remember that market volatility is normal and, historically, the market has corrected itself. However, there is no 100% safe play when it comes to investing. Even if you had the most diversified portfolio in the most low-risk investments, investing is gambling and there is the chance that you could lose your money, albeit the chances of that happening are incredibly slim.
3. Is there anything I can learn from a downturn in the market?
You can be honest with yourself and reflect on how you behave during uncertain times. Did you panic? Did you overreact? Were you as prepared as you thought you would be? The best way to learn to navigate a volatile market that is melting down is to go through one. It might even be helpful to take notes and then meet with your financial professional. Working together, you can design a new strategy to help see you through this market downturn, and even prepare for the next market crash, because it will happen again, at some point.
4. What should I do now?
Market volatility will impact people differently, and, depending on your age and how much you have tied up in investments, each financial decision you make is pivotal to your short- and long-term strategy and goals. This might sound strange, but as the market is imploding before your eyes, you may consider not doing anything. It could be possible that one of your investments is a lemon or the company was mismanaged and goes out of business. These things happen, but that is why you have a diversified investment portfolio.
When the market is unstable and things look to be going from bad to worse, remember that it won’t last forever. There have been many fluctuations over the years, 12 big recessions and counting, and the market has always come back. If you are uncomfortable with the financial world or just feeling overwhelmed or frightened, consider meeting with a financial professional to review available options. This could help ease some of the stress and anxiety.
5. Have I discussed my concerns with a financial professional?
Financial professionals are trained to deal with market volatility and manage people’s money to align with their own personal financial strategies and goals. They can be very helpful in reassessing your risk tolerance, revising your portfolio to mitigate the possibility of unexpected obstacles, and helping you to work toward new goals using fresh strategies more attuned to the immediate financial climate.
Important Disclosures
This article was prepared by LPL Marketing Solutions
LPL Tracking #
