Key Points
- Avoid emotional decisions like panic selling.
- Use downturns as a chance to review your investment strategy.
- Falling markets can offer buying opportunities.
Investing in the stock market can be as thrilling as it is nerve-wracking. One day your portfolio is up, the next it’s plunging. It’s natural to feel a mix of concern and confusion when you see red on your investment dashboard.
But stock market downturns are not unusual—they are an inherent part of long-term investing. Whether you're a seasoned investor or just starting out, knowing what to do when your stocks are down can make the difference between panic-driven mistakes and smart, calculated moves.
Stay Calm and Avoid Emotional Decisions
The first and most important step is to stay calm. Emotional reactions often lead to poor financial decisions, such as panic selling. When markets dip, it can be tempting to cut your losses and sell your investments. However, reacting emotionally may cause you to lock in losses and miss out on the eventual rebound, as we have already seen happen this year. Historically, markets tend to recover over time.
By keeping a level head, you give yourself the chance to make rational, informed decisions instead of impulsive ones.
Revisit Your Investment Strategy
A downturn is a great opportunity to reassess your investment strategy.
Ask yourself:
- Are your investments aligned with your financial goals?
- Is your current asset allocation in line with your risk tolerance?
- Do you have enough time to weather short-term volatility?
If your portfolio feels riskier than you're comfortable with, it might be time to rebalance/reallocate. Adjusting your mix of stocks, bonds, and other assets can help you better manage future market swings.
In WealthTrace you can add up to two future asset reallocations to see how reallocating or rebalancing your portfolio affects your plan projections. Most people will switch to a more conservative asset allocation as they approach retirement to reduce their exposure to risk.
Diversify to Reduce Risk
One of the most effective ways to protect yourself during market downturns is through diversification. By spreading your investments across different asset classes—such as stocks, bonds, real estate, and even international markets—you reduce the impact that a decline in any one area can have on your overall portfolio.
Diversification doesn’t eliminate risk entirely, but it can smooth out volatility and provide more stable returns over time. If your portfolio is heavily concentrated in a few sectors or companies, now is a good time to consider rebalancing and expanding into other areas to better manage future risks.
In WealthTrace you can easily explore the impact of a more conservative asset allocation vs a more aggressive asset allocation on your plan projections.
Below we can see the Monte Carlo score for a 40-year-old individual with an aggressive asset allocation up until retirement at age 60 where he will reallocate to a conservative mix of investments. His median end of plan investment balance is projected around $2,448,228.
If he instead chooses a very conservative asset allocation, we can see that his Monte Carlo score drops down to 86% and his median end of plan investment balance is projected at around $1,051,755. This is a good example of how a younger person, generally speaking, should invest more aggressively for the long run.
Make Strategic Moves if You Must Sell
Sometimes, selling during a downturn is unavoidable—maybe due to an emergency, job loss, or major life change. If that’s the case, aim to be as strategic as possible.
- Prioritize which assets to sell. Look at stocks that have held their value or no longer align with your long-term goals.
- Avoid dumping high-quality investments at their lowest point if you can.
- Consider taxes: In a taxable account, selling at a loss may allow you to offset gains elsewhere through tax-loss harvesting.
The key is to reduce the financial impact of selling while still addressing your immediate needs.
Look for Opportunities, Not Just Losses
Market downturns often present opportunities. Quality stocks that are temporarily undervalued can become more affordable, allowing you to invest in solid companies at a discount. If you have extra cash or a regular investment plan (like dollar-cost averaging), this can be a chance to increase your positions.
Remember the famous Warren Buffett quote: “Be fearful when others are greedy, and greedy when others are fearful.” While you shouldn’t throw caution to the wind, downturns can be a good time to build wealth for the long term.
Tune Out the Noise, Focus on the Big Picture
News headlines can amplify fear during a market slump, but short-term volatility is part of the journey. Trying to time the market based on daily news is a strategy even seasoned professionals struggle with. Instead, keep your focus on the bigger picture.
Revisit your financial goals and timelines. If your goals are still years away, there’s no need to react to temporary setbacks. Staying the course through downturns has historically been a successful strategy for long-term investors.
The Bottom Line
Seeing your stocks decline in value is never pleasant, but it's important to remember that market drops are a normal part of the investment cycle. The key is to stay calm, reassess your strategy, look for opportunities, and keep your eyes on the long-term horizon. And if you do have to sell, do it strategically and thoughtfully. Investing isn’t about avoiding losses—it’s about managing them wisely. By staying informed and focused, you can turn periods of market turbulence into steppingstones toward future financial success.
Do you know if your asset allocation makes sense for your state in life? If you aren’t sure, sign up for a free trial of WealthTrace to build your financial and retirement plan today.