Ten Steps To Take When Stocks Plunge

By now, many of us are experiencing a range of emotions regarding the ongoing sell-off in global stock markets. Only in rare cases does it make sense to panic and get rid of your holdings. Using my own professional and personal investment experience over the last few decades, I’ve put together a list of ten actionable items that may help.

10. Take a deep breath, and go do something else for a few hours. Chances are the market will oscillate within that time and you will be happy you didn’t do anything rash. In my last job where my team managed billions of dollars in global fixed income, I often encouraged our members to go for a walk outside for fresh air to gather thoughts and take a break from the screens. Perspective usually helps.

9. Call your financial advisor and tell him/her that you are freaking out. You will learn much about his/her abilities and expertise by the way the call is handled. A financial advisor’s job is to help you plan your finances for the future; part of that job is to keep you from acting impetuously based on short-term panic attacks so that you do have finances left for the future. If your advisor joins you in the panic, don’t sell all your assets right now, but do think about interviewing for a new advisor sooner rather than later. If you are in charge of your own finances, consider hiring a professional; there are a variety of services out there at a variety of prices.

8. Realize that not all assets in your portfolio move with the value of stocks. If you own stocks, chances are that you have a job, a bank account, and maybe a house. As such, remember that the value of cash doesn’t decline when the stock market does, and rarely does the long-term value of your house fluctuate with short-term stock prices. Furthermore, hopefully your equity holdings are part of a balanced, diversified portfolio. If your portfolio consists entirely of stocks, then I suggest you look at #9 and consider finding a new financial advisor (or fire yourself from this job, if you are responsible!)

7. Learn more about the bond market, especially the global bond market. According to a February 3 press release by BNY Mellon (click HERE), their survey of over 500 retail investors and advisors found that “70% of retail investors do not hold any global fixed-income investments and 62% do not see global fixed-income as important.” Given the size and diversity of the global bond market, this is a sad finding. When stocks fall in value, quite often government bonds increase in value. Furthermore, while stock markets across countries tend to be quite correlated, bond markets are much less so. So far this year, government bonds of most of the major developed bond markets have performed very well (emerging markets, not so much). Having a mix of foreign bonds in the portfolio is often a good idea for diversification.

6. Get some exercise. Everyone knows that exercise reduces stress. Exercise is also proven to immediately improve cognitive function; post the workout perhaps you will be able to make better decisions. Physical activity also improves moods, so maybe you will feel less gloomy about your portfolio, at least temporarily. At a minimum, 30 minutes of jogging to the latest Spotify workout mix will keep you away from the computer screens and news headlines which overhype the feeling of doom in financial markets.

5. Spend time reviewing how your wealth is divided. If you are really upset about the latest rout in equity markets, chances are that your wealth isn’t allocated in the right way. In a recent article, Jason Zweig (click HERE) points out the excellent advice given by investment thought leader Ashvin Chhabra. Instead of thinking of your portfolio in terms of stocks and bonds, “you should hold a ‘safety’ bucket of stable assets, plus an ‘aspirational’ basket of riskier investments. [Your] portfolio should achieve three goals: insure your standard of living against severe short-term loss, maintain it over time and improve it. You want a mix of assets that can fund each of those goals no matter what the stock and bond markets do.” If you are extraordinarily stressed by your portfolio’s performance, perhaps you are more risk averse than expected, and it’s time to put more assets into the stable bucket. Or, maybe you just need to add up your assets that have been stable this year and realize it’s just not that bad.

4. Please, please do not sell everything in a panic. One of the most awful and repeated events I have witnessed as a portfolio manager has been when investors cashed out at the worst points in the market, at the peak of panic points, and then missed the inevitable rebound. Sometimes the rebound takes weeks, sometimes years, but too often investors do not recover the losses because they keep their funds out of the market. When Warren Buffet said of his stellar investment strategy “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful,” he is saying that he finds the best buying opportunities when people are the most scared and have sold in a panic. Be like Warren Buffet, don’t panic when other people are.

3. If you must reduce risk, be prudent about it. There are several ways to cut risk, but I like thinking about risk reduction in two principal ways. First, perform the inverse of “average cost buying;” sell small bits of your portfolio over a period of time, thereby averaging the price you get for your assets. Chances are you are like most people, and can’t pick the absolute high of the day or the week; if you sell some of your securities over time, chances are you won’t pick the absolute bottom either.   Second, set yourself some “stops” on the worst losers / biggest stressors in your portfolio. For example, say your stock has fallen from $20 to $18, and you are justifiably upset. Pick a price a bit lower, one that you absolutely do not want to witness, and put an order in such that you sell if the price falls below this number. There is no proven rule dictating where that number should be relative to the current price, it’s really a personal preference.

2. Learn to meditate! Before you snicker or dismiss this idea, do some research on the subject. Majorly successful (and rich) investment gurus profess a meditation practice. If you don’t know how, download the Headspace App and get 10 sessions free. Each session lasts only 10 minutes, and we all can find 10 minutes a day.

l. Invest. Perhaps instead of focusing on selling in a panic, think of buying with a long-term strategy. About half of Americans do not have a retirement account. If you are one of them, now is a good time to get going; you are getting a bargain compared to last year’s prices! Social security will never be enough to be a sole source of income for retirement, and it won’t grow through time like a good portfolio will. Investing should be a long run proposition, and in order to build up a nice nest egg, you need to start now.