4 Things NOT to Do During a Market Correction
May 6, 2020
Market corrections happen. Historically speaking, a market correction (defined as a 10 percent drop in stock prices) happens roughly once a year and recovers within a few months. Since 1920, the S&P 500 drops five percent every four months, 10 percent every 16 months, and 20 percent every seven years.
Elephant in the room: the spring of 2020 was no ordinary market correction. The COVID-19 pandemic had an enormous effect on markets all over the world as people self-isolated and supply lines were disrupted from top to bottom, not to mention the near-global shutdown of the service, travel, and hospitality sectors. The S&P 500 dropped 34 percent in just over a month, and as of this writing, we don’t know how long it will take to recover.
A market correction can be scary, especially if you’re a business owner or you have a large portion of your assets invested in stocks, but it’s not a reason to panic. Here are a few things to keep in mind when the markets turn south.
1. Don’t Focus on the Past
There are a lot of things you could have done. You could have sold a month ago. You could have allocated more conservatively. You could have hedged your portfolio. But you didn’t. Markets always look more predictable in the rearview mirror, but you’re not helping yourself by dedicating all your mental energy to the moves you could have made.
2. Don’t Panic Sell
You’ve probably heard the saying: it’s not a loss until you sell. Translation? An unrealized loss isn’t actually hurting your bottom line — if your portfolio lost 34 percent of its value, you can just sit on it until it goes back up and you won’t have lost anything. Unless you’re in desperate need of cash, now is the time to ride out a bad market.
Even if you are in desperate need of cash, selling stocks isn’t necessarily the best way to come up with the money. It’s very unusual for every asset to lose value at once, so take stock of the other assets you own. There’s a good chance that your realized losses will be less if you sell property or equity in your business, or even take out a loan.
3. Don’t Ignore Opportunities
Every cloud has a silver lining. Think of your devalued stock as a brand-new investment. If a given stock was trading at $100 a share a month ago and is now down to $64, imagine you’ve just been given the shares at $64. How long will it take to get back to $100? You might get better returns selling at $64 and investing somewhere else instead.
If the market correction hasn’t hit you too hard and you still have some cash to spare, now might be the time to buy into stocks that you think will recover well. If you’d bought into the S&P 500 at the bottom of the 2008 recession, you’d have seen your investment double in the next two years.
Finally, think about tax implications. Capital losses can be deducted from earned income up to a limit of $3,000 in losses per year — bigger losses than that can be carried forward to future years. Of course, deducting $3,000 from your income every year isn’t necessarily a game-changer, but every little bit helps.
4. Don’t Compare Your Strategy to Someone Else’s
There will be an endless supply of articles about how the 1% handle market corrections, how Elon Musk handles market corrections, how Warren Buffett handles market corrections, and so on. They’re a dime a dozen.
But you’re (probably) not Warren Buffett. Your portfolio is different, your goals are different, your priorities are different, and your asset allocation is different. Every individual investor has a different risk tolerance and a different time horizon.
At First Western Trust, we pride ourselves on taking a unique, holistic approach to every investor. We call it ConnectView. We know that wealth is about more than just the bottom line on your balance sheets — it’s about your lifestyle, the life you give your family, the success of your business, and the legacy you leave behind. During a market downturn, we’ll take a comprehensive look at all of your assets, then examine your goals and priorities with respect to every aspect of your wealth.
If you’re wondering how to tailor your financial plan for an existing market correction or how to prepare for the future, talk to First Western today!