Smart401k Blog

What Investors Should Do in a Market Correction

by David Roberson | Jan 29, 2016

As investors, we love seeing the markets rally and our account balances increase in value. But when the markets fall, it can really test our mettle. Despite the uncertainty you may feel when a volatile market takes you on a roller-coaster ride, one thing is clear: As investors, we should prepare for the bumpier experience ahead.

Resist the urge to panic and sell all of your shares. Although market movements over the last few weeks may have caused you anxiety, what we’re actually seeing is a return to normal market conditions. 

For the past few years, interest rates were kept at near zero, helping to suppress market volatility. As the Federal Reserve brings its bond-buying program, known as quantitative easing, to an end, the market is now turning its attention to the Fed’s timeline for raising rates. Such a transition back to “normal” monetary policy makes it clear that volatility will likely rise, along with investor uncertainty.

Nonstop media coverage of geopolitical concerns, such as Ebola and the potential for a European recession, are heightening consumer anxiety. This feeling of uncertainty could affect markets in the short term. In the past, we have experienced scary things like wars, oil embargoes and terrorist attacks. Turn to any page in a history book and you’ll see reason for unease. Over long periods of time, however, the market continues to move higher.

It's been three years since the last market correction (defined in financial industry circles as a decline of 10 percent or more). Whether or not the volatility we’re experiencing is that long overdue correction, it’s important to note corrections can’t be avoided. In the last 20 years, we’ve experienced 32 corrections and seven bear markets, yet the Standard & Poor's 500 index increased by 300 percent during that time, for the 20-year period ending Oct.13.

In addition, market movements are drawing attention away from the positives we’re experiencing in the United States. A stronger U.S. dollar and falling oil prices are helping to increase consumer purchasing power, the housing and job markets are improving and companies are strengthening their balance sheets.

However, it’s natural to wonder if you should make changes to your investments when faced with such market frenzy. But before you pull any triggers, consider these three questions:

1. How long do I have until retirement?

If you have more than a decade until you need to access your retirement accounts, do your best to ignore the day-to-day market fluctuations. Short-term events should not impact your long-term investing strategy.

If you have less than a decade until retirement or are already retired, meet with a financial advisor to discuss how you can better position your portfolio to respond to market volatility. For example, you may want to consider reducing your exposure to small-cap equities, in favor of less volatile large-cap equities.

2. Have I recently rebalanced my accounts? 

You should rebalance your accounts regularly, or least twice per year. If you have already done so in the last 90 days, don't change your mutual fund selection.

3. How do I feel about taking risks in my portfolio? 

If you find yourself constantly fiddling with your retirement accounts, it could be a sign your risk tolerance has changed or your investment strategy is no longer working. A financial advisor can help you evaluate your feelings about risk, and determine if changes to your plan may bring you closer to achieving your financial goals.

When you’re a long-term investor with long-term objectives, worries over market fluctuations should always take a backseat to keeping your investment strategy on track. That’s where your focus needs to be – not on the bulls, bears, corrections or pullbacks. If all else fails, turn off the television and do your best to stay the course.

This post is part of Smart401k CEO Scott Hollsopple’s contribution to the U.S. News & World Report Smarter Investor blog series. To view the original article, click here.

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