How to Manage Market Downturns
After a “comfortable” 2021 with stocks frequently touching new highs every month, the markets have hit a rough patch to start the year.
There are a lot of unpredictable variables being discussed by market experts (as a firm, we closely follow the research & philosophies of Vanguard & Dimensional Fund Advisors or DFA). A few of the most significant unpredictable variables discussed are 1) The Omicron Variant 2) Accelerating Short-Term Inflation 3) A Federal Reserve that may need to act decisively to contain inflation. Corporate earnings releases and important economic indicators are also coming out throughout February. Markets will likely be volatile. Volatility is a constant that tends to spike when stock markets endure valleys. These valleys (which are inevitable), have given way to higher peaks and have rewarded disciplined investors.
We can’t control the markets actions, the Fed or Inflation. Trying to predict these areas and time the markets is next to impossible.
Focus on what you can control in the investment process.
- Create an investment plan to fit your needs and risk tolerance
- Diversify globally
- Manage expenses, turnover & taxes
- Stay disciplined through market dips and swings
- Establish an emergency reserve & set aside funds for short-term goals
Focusing on what you can control in the investment process has served investors well. We will continue advising clients on focusing on what they can control in the investment process during other turbulent times (e.g. 2008 Great Recession, Trump 2016 Election & March 2020 Covid outbreak).
I have attached a few slides you might find interesting: Stock Returns & Market Downturns shows the returns of the market after large declines. VGD Market Pullbacks shows 2020, the ~ 30% loss in the market in March ended up being an 18% gain by the end of the year.
Please don’t hesitate to contact us if you want to discuss in further detail.