Many of today’s investors are uncomfortable in a declining market. But declining markets aren’t unusual: According to Ned Davis Research Inc., which analyzed years of Dow Jones Industrial Average data, dips (declines of greater than 5%) occur 127 times every 50 years; moderate corrections (greater than 10%) occur 33 times; and severe corrections (greater than 15%) occur 16 times. Bear markets (greater than 20%) occur nine times in a 50-year span.
Make it personal
Market declines are unlikely to be a problem for long-term investors, as markets typically recover after a downturn. But even if you’re a short-term investor, a market decline won’t necessarily affect you. The market may be down, but that doesn’t mean your personal holdings have dropped as well; the only share prices that should matter to you are the prices of shares you own.
So when the market declines, before you panic, look at your holdings. When did you purchase them? At what price? What is the current share price? When do you really need the money? Does the gain or loss you’ve experienced on your overall portfolio allow you to meet your goals, given your investment time horizon?
Minimize the downs
You may also want to consider some proactive steps to minimize the impact of market declines on your portfolio. You can invest in a variety of mutual funds to spread around your risk through many vehicles, including dozens or even hundreds of stocks, domestic and international funds, small-capitalization and large-capitalization investments, and more.
You also can invest in companies that pay dividends or interest, cushioning downturns with investment income. And you can dollar-cost average (make smaller investments at regular intervals over a period of time, which allows you to purchase more shares when prices are low) instead of making a single large investment.
Discuss this with your advisor; he or she may have more suggestions.