Resist the urge to ‘do something’ with your investments in a downturn

My Willow Creek colleagues and I recently received some client feedback that every wealth adviser dreams of hearing: our client shared that rather than panic during this period of market volatility, she leaned into what she had learned from her adviser over the years, which is to imagine us busily buying up great stocks that have now suddenly become much cheaper.

This, and her trust that we were fulfilling our fiduciary duty to her, helped her remain calm and disciplined in the face of a lot of bluster about the market tanking.

We know this is very, very difficult to do, especially when your own brain is urging you to do something — anything! — that will make the fear stop and help the world feel safe again. During these days of drastic market ups and downs, investors are receiving messages from so many places, all meant to induce fear and prey upon feelings of uncertainty.

But the fact remains that markets have always recovered after all steep declines — yes, always — and there is absolutely no reason not to believe this time will be any different.

Those who think the right thing to do is to “get out” of the market are the ones who will likely lose out on the recovery, whenever it comes. Any economist out there can show you one hundred years of data to prove this very thing.

So, in the face of mounting pressure and worries about the future, what should a successful investor do? Equally important, what should a successful investor not do?

Read on for the dos and don’ts of handling market volatility.

DO accept that the market is constantly fluctuating. And this is a good thing! Without movement, the stock market would not have the potential for growth. Risk is always present, but that is where the return lies.

DON’T let financial news and headlines make decisions for you. Obsessively watching the market go up and (especially) down will drive you nuts, and it could trick you into paying more attention to your emotions than your logic.

DO play the long game. Successful investing is a marathon — not a sprint — and successful investors know that short-term hiccups (or full-on downturns) will not last forever.

Any wealth adviser worth their salt will set up client portfolios to withstand market fluctuations. The market has always and continues to trend upward, so trust the 100 years of history (not to mention Nobel-prize-winning economists), which shows that a diversified portfolio will buffer short-term market volatility while providing long-term growth.

DON'T forget what happened last time (and the time before, and the time before that).

The tech bubble of the early 2000s, the financial market and real estate collapse in 2008, and the shock of the coronavirus pandemic in 2020 were all followed by periods of significant stock market returns.

While predicting the future is impossible, we see no reason not to believe that markets will once again recover strongly. The question is when it will begin, but only hindsight will be able to answer that question.

DO stay disciplined and trust your investment plan. Although the financial news networks will often try to tell a very different story, this is where the real work happens.

It can be difficult to stay disciplined, especially in the face of headlines meant to terrify you, but successful investors don’t change their plan that was carefully crafted to withstand these exact circumstances.

My colleagues and I are very busy during periods of market volatility, but not because we’re making huge changes to our clients’ portfolios.

We are busy having important conversations with our clients to make sure they understand that they don’t need to panic. The worst thing you could do right now is to get out of the market or drastically change your asset allocation.

DON’T forget to rebalance. Market volatility is very, very helpful for the long-term investor — but only if you remember to rebalance your portfolio, which is the process of bringing your portfolio back into alignment with your investment goals and keeping your risk/return ratios on track. Rebalancing delivers the most elusive of investment strategies: buying low and selling high.

DO take advantage of tax-loss harvesting. When investments in your taxable portfolio fall in value, they can be sold to “harvest” the loss while reinvesting the proceeds into a similar investment. Banking these losses during a down market can have a tangible impact on your tax bill in years to come.

Take a page from long-term, successful investors, who perhaps used to worry but now feel comfortable enough to trust the process and not let anything derail their investment plan. The best advice my colleagues and I can give you is to learn how to make peace with the process and enjoy the journey toward achieving your financial goals.