Beware… the market is falling.
The 10+-year bull run is finally coming
to an end… and you stand to lose everything.
Your retirement, your savings, the family vacation you were planning… it could all crumble like a castle of sand.
I am exaggerating… but only a bit.
With the recent commentary from President Trump regarding U.S.-China trade talks, the outlook certainly looks negative.
Should negotiations fall apart, and both countries decide to impose maximum tariffs, the markets will turn and decline substantially.
When this happens, most investors will feel like fish out of water. They always do when the market shifts direction.
I don’t want you to be one of them.
That is why I’ve prepared these simple principles for you to follow when the next downturn hits.
Stay Calm
The first thing you should do when the market turns sour is to stay calm.
Too often I see people sell into the panic (usually these are the same ones who buy into the hype), and it’s a sure strategy for going broke. Investing decisions should be based on reason, not emotions.
In fact, you have no reason to worry. Downturns are normal and short-lived. They shouldn’t affect your long-term investment plans. Since 1945, the S&P 500 has declined by 5% to 10% 78 times. On average it was only a month before it returned to previous levels.
Don’t Stop Investing
You might also be tempted to stop investing altogether, wait for the worst to pass, and get back in once the market has turned. The trouble is that, unless you have a crystal ball, you can’t time the bottom… and you shouldn’t try. First, the market could fall further. If that happens, all you’ve succeeded in doing is catching a falling knife by its edge.
You could also wait too long to get back in and miss the start of a new bull market.
What’s the smart move? Let me introduce you to the concept of dollar-cost averaging.
Dollar-cost averaging is an excellent tool for building wealth over long periods because it works so well during downturns. By investing the same amount of money each month, regardless of the stock price, you are in effect neutralizing short-term volatility and taking the market direction out of the equation.
Some months you might buy at a better price than others, but, in the long-term, your average price stays the same… and it’s the purchases during downturns that improve overall returns because that’s when prices are cheap.
Focus On Defensive Sectors
Defensive sectors don’t get enough attention.
It’s understandable. When the economy is doing well, everybody is looking for the next hot technology company that could double in a year. However, if you take that approach, you can also see your portfolio lose half its value during a downturn.
As a prudent investor, you should always hold part of your portfolio in defensive sectors such as utilities, consumer staples, or health care. I keep 30% of my portfolio in defensive stocks. Sure, I sacrifice some growth when the market is booming, but I also sleep a lot better and even make gains during downturns.
The best part is that defensive companies are the ones paying big dividends and that can supply the much-needed extra cash flow when the economic situation deteriorates.
Good investing,
Leon Wilfan
