Weathering Market Downturns
Five questions to help you maintain perspective
Staying calm amid market turmoil is not easy, especially when the financial headlines are blaring with words such as panic and collapse. Your first instinct may be to abandon the markets, but that may only create turmoil for your long-term financial plans. Before taking any action, ask yourself some basic questions.
1. Have my long-term needs changed?
There is no way to lessen the pain of watching your assets decline 20% or even 30% or more during a severe market downturn. Still, bear markets are as much a part of the business cycle as bull markets. That’s why it’s so important to think rationally before acting when markets change. You should also work closely with your advisor. He or she will help make sure your plan and portfolio stay in sync with your needs, goals and risk tolerance. It may be difficult at the moment, but waiting out a market downturn may be your best course of action.
If you need access to your money in the short term, meet with your advisor to determine whatimmediate steps you can take to reposition your assets.
2. What are my immediate needs for liquidity?
If you depend on a portion of your investments for current income, your financial advisor can help you determine what steps you can take to try to meet your current income needs while not disrupting too severely the long-term value of your holdings.
If you do not need your stock assets for current income, you may not want to do anything during a period when stock values have declined. During a credit crunch or a decline in real estate values, it may seem as though stocks are one of the more liquid assets you own, but remember that stocks generally serve investors best when they are used to meet long-term, not short-term, needs. Overreacting to a stock market decline could bring losses that you will regret incurring when the market rebounds as it will, if history is any guide.
3. Has my tolerance for risk changed?
When you first started working with your advisor, you probably developed a risk profile to help him or her ascertain whether your natural temperament with regard to investing is conservative, moderate or aggressive. Difficult markets help you find out what your true temperament is. If volatile markets bring too many sleepless nights, then you may need to dial your overall portfolio back to a more conservative stance. Alternatively, if you view a major decline as an opportunity to buy stocks at a significant discount, you may be willing to take a more aggressive approach with your investments.
4. Does my current strategy match my attitude toward risk?
If a market decline has revealed your true temperament for risk, the next step is to make sure your current holdings match your preferred style. Talk to your advisor so he or she can ensure that your long-term approach is aligned with the level of risk you are willing to take.
5. Am I following an investment strategy that is suited to any market environment?
It is easy to let the current state of the market influence your investment strategy. In a bull market, you may want to load up on stocks. In a bear market, you may be tempted to sell every stock you own. But those types of reactions may not serve your long-term goal of accumulating enough assets to educate your children or finance a retirement that could last two decades or more.
One of the best ways to invest through any type of market may be to follow these principles:
- Allocate your holdings across the major asset classes, such as stocks and bonds, to help you pursue the optimal returns for the risk level you are willing to undertake.
- Diversify within each asset class to gain exposure to different investment styles, such as growth and value, and to various sectors of the market.
- Rebalance your holdings periodically to adjust after market activity and to keep your current asset mix in line with your desired goals and risk tolerance.
No investment strategy can ensure a profit or protect against a loss.
The Value of Advice
Of course, your financial advisor — who knows your goals, temperament and total holdings — is one of the best people to help you decide how to respond to a market downturn. Thinking through your answers to the questions outlined here, either before contacting your advisor or during a meeting with him or her, will help ensure that you react wisely to any drastic changes in the market. During difficult times, it is a natural temptation to want to do something. Meeting with your advisor and reexamining your investment plan can help satisfy that urge and could prevent you from taking any sort of action that would disrupt your long-term goals.
The views expressed are those of the author(s) and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation to purchase any security or as a solicitation or investment advice from the Advisor. Unless otherwise indicated, logos and product and service names are trademarks of MFS® and its affiliates and may be registered in certain countries. Issued in the United States by MFS Institutional Advisors, Inc. (“MFSI”) and MFS Investment Management. Issued in Canada by MFS Investment Management Canada Limited. No securities commission or similar regulatory authority in Canada has reviewed this communication. Issued in the United Kingdom by MFS International (U.K.) Limited (“MIL UK”), a private limited company registered in England and Wales with the company number 03062718, and authorized and regulated in the conduct of investment business by the U.K. Financial Conduct Authority. MIL UK, an indirect subsidiary of MFS, has its registered office at One Carter Lane, London, EC4V 5ER UK and provides products and investment services to institutional investors globally. This material shall not be circulated or distributed to any person other than to professional investors (as permitted by local regulations) and should not be relied upon or distributed to persons where such reliance or distribution would be contrary to local regulation. Issued in Hong Kong by MFS International (Hong Kong) Limited (“MIL HK”), a private limited company licensed and regulated by the Hong Kong Securities and Futures Commission (the “SFC”). MIL HK is a wholly-owned, indirect subsidiary of Massachusetts Financial Services Company, a U.S.-based investment advisor and fund sponsor registered with the U.S. Securities and Exchange Commission. MIL HK is approved to engage in dealing in securities and asset management-regulated activities and may provide certain investment services to “professional investors” as defined in the Securities and Futures Ordinance (“SFO”). Issued in Singapore by MFS International Singapore Pte. Ltd., a private limited company registered in Singapore with the company number 201228809M, and further licensed and regulated by the Monetary Authority of Singapore. Issued in Latin America by MFS International Ltd. For investors in Australia: MFSI and MIL UK are exempt from the requirement to hold an Australian financial services license under the Corporations Act 2001 in respect of the financial services they provide. In Australia and New Zealand: MFSI is regulated by the U.S. Securities and Exchange Commission under U.S. laws, and MIL UK is regulated by the U.K. Financial Conduct Authority under U.K. laws, which differ from Australian and New Zealand laws.