Below are some strategies for coping with market downturns. Before getting to that though, it is fundamental to have an appropriate portfolio before the downturn occurs. That means not only properly diversified, but also one with a risk level that you will be comfortable with when the inevitable downturns come.
One very popular strategy is to simply don’t look at your portfolio. Most people, when they look at their portfolios, are happy when the value has increased and are unhappy when it has decreased. The magnitude of the change seems less important than the direction in determining how they feel. Therefore, to maximize happiness, most people should probably look at their portfolios less often. Here’s why:
From the beginning of 1988 (I don’t have daily total return data prior to 1988) through 6/28/22, the U.S. stock market (using the S&P 500 total return index still) has had an average annual return of about 10.5%. In other words, ignoring transaction costs and taxes, $10,000 invested at the end of 1987 in U.S. stocks with dividends reinvested would have grown to about $315,000 today. If you looked at your portfolio daily during this period you would have been unhappy about half the time, while if you looked annually, you would have been happy about 4 out of 5 times. Here are numbers:
|Frequency of Looking||Happy||Sad|
Ideally you could be both happy and informed, but in this case, there is a trade-off; knowing the current value of your portfolio frequently is likely to make you less happy.
Another key strategy is to have a significant margin of safety. In other words, spending significantly below your resources (relative to income pre-retirement, and relative to portfolio size post-retirement) gives comfort that in virtually all situations that you will be just fine. We probably don’t need to spend as much as we do. I’m going to make some book recommendations below so here I’ll mention Walden; Or, Life in the Woods (1854) by Thoreau or The Quest of the Simple Life (1907) by William Dawson for perspective on how much we need.
You can also rebalance your portfolio. (We take care of this for you if you are a client.) This means trimming portfolio holdings that have been doing better and purchasing more of relative losers. This is important in good times as well, and is difficult for people to do in both scenarios.
You might also add to your portfolio when the market is down. We wouldn’t recommend holding cash waiting for a downturn, but if you find you have excess cash it’s always a good time to invest (because expected returns on investments are always higher than cash, though realized returns may turn out not to be).
If you have holdings in a taxable (i.e., non-retirement) account you may also be able to tax-loss harvest. (Again, we take care of this for you if you are a client.) This means selling positions that have losses to reduce your taxes. There are nuances to this (e.g., wash sale rules) but it can be a good opportunity.
It can also be helpful to maintain a long-term perspective and be aware of market history – plus ça change, plus c’est la même chose! This is harder if you aren’t a financial professional as the time investment is probably unreasonable for an individual, but I would recommend you read The Rational Optimist (2010) for a much-needed counterpoint to the fear and panic that seem to feature in our society.
Finally, and this may be the very best recommendation, you could read books such as Man’s Search for Meaning by Viktor Frankl. It is difficult (and perhaps impossible) to read a first-hand account of the Holocaust and simultaneously worry about your portfolio size!