5 Things to do After a Market Sell-Off

March 2020 will go down in history as the fastest bear market to ever occur. A bear market is defined simply as a 20% drop from a market high. On average, it takes around 250 days peak to trough for a bear market to occur. This bear market happened in about 20. This sell-off’s unprecedented velocity has left some investors scratching their heads on whether they should be doing something in response. It is a natural response and an odd one in this moment considering most may well be better off doing nothing. There are steps that one can take during moments like these to position themselves better going forward - Here are some places to start.

1. Rebalance your 401k

   • According to google search trends, “rebalancing” and “401k” searches have spiked. As we go through this period of unprecedented market volatility, many Americans are logging into their 401ks to “assess the damage.” This may lead some to ask themselves, “should I be doing something here?” Rebalancing is the act of adjusting the asset allocation (the mix of stocks vs bonds) of your portfolio. As the market fluctuates, so does the asset allocation of your portfolio. If you entered 2020 with a portfolio that was 70% stocks and 30% bonds, by March 24th the account would have drifted to about 64% stocks and 36% bonds (assuming SPDR® S&P 500 ETF and iShares Core US Aggregate Bond ETF). Market fluctuation can have material effect on the makeup of a portfolio making periodic rebalancing a necessity. If your portfolio behaved similar to this example, now might be the time to rebalance to your original 70 / 30 asset allocation.

2. Assess your emergency fund

   • For some American workers the COVID 19 outbreak has resulted in loss of employment or a disruption in income. It is moments like this where one is reminded how important it is to have an adequate emergency cash reserve. I recommend an emergency fund of 3-6 months of expenses. This should be kept in a separate savings account and be used only in moments of absolute need. To some this can seem like a daunting task, let this be a goal that you work towards on a monthly basis in increments. An additional step in the world of liquidity would be to consider a home equity line of credit (HELOC). A HELOC enables you to borrow against the equity in your home to access liquidity.

3. Lean into your accumulation plan

   • “Stocks are the only thing people buy less of once they go on sale" is a quote I have thought about a lot over this past week. We have a lot of clients on accumulation plans, meaning they have committed to a monthly or quarterly deposit into an investment / retirement account. Now might be a time to take a look at your budget and decide if it may be within means to increase your monthly deposit or begin one if you are not on an accumulation plan. Depending on your time horizon, one likely will look back on this moment as a tremendous buying opportunity as these deposits are dollar cost averaged into the market.

4. Reassess risk tolerance

   • Unfortunately, this correction has left some investors completely shell shocked. As I have written in recent articles, the last 10 years has been a period where the market has, generally speaking, been one directional. I believe that this resulted in many investors becoming potentially too complacent or comfortable with their risk tolerance. Take an honest assessment at how you stomached these past few weeks. Behavioral finance tells us that we experience market loses twice as intense as we enjoy market gains, so it is natural to have felt some pain. But if you find yourself in an unbearable position, it might be time to adjust your asset allocation. Be careful about the timing if you do choose to adjust your asset allocation. While this option is better than cashing out, one could unintentionally make damage permanent from a down market if they rebalance before a recovery.

5. Have an honest look at your time horizon

   • These last 4 weeks have served as a good reminder on why it is so important to have a time horizon for respective investment accounts. Remember this time horizon during times of volatility. If it’s your 401k, then you already know that is money for retirement as it is locked up until 59 1/2. Having a solid understanding of the time horizon for invested dollars can help improve decision making during periods of market volatility.

6. (bonus item) Consult a professional advisor

   • This can be a daunting time to be an investor, especially one going at it alone. If you find yourself having a hard time staying organized or making decisions during periods of uncertainty, then it might be time to consult an advisor. Having a partner to help define a framework for decision making can take much of the headache out of an already stressful time.

This is a stressful time. However, this is a time that we will get through. This market correction has taught many investors many valuable lessons and I believe will make many people better investors for the long run. It is important to remember during periods of uncertainty to resist the urge to make knee jerk decisions. As I have written in the past, when you are unsure about what to do - you might be off doing nothing. However if you are itching to do something, these 5 things could be a good place to start.

Please give me a call if you have any questions,

-James Chapman