What Should I do to Survive a Market Drop?

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It isn’t IF, It’s When.

Take a moment and think back a few short years, its early 2007, things look great. Your house has never been more valuable, your retirement accounts have been humming along and you just got a promotion at work, then all heck breaks loose. Stocks drop by more than half, your job is gone and you fall behind on your mortgage. Maybe this didn’t happen to you, but it probably happened to someone you know. I want you to close your eyes and remember, how did you feel when that happened? Were you able to keep on going, feeling good about things and ignore what was happening in the markets, or were there sleepless nights and anxiety? Were you a seller or a buyer?

This is very important stuff right now. Back then, the market had been rising for over 4 years, and then, boom. Before that we had another major drop in 2000-2003, following a 6 year rally to new highs, before that in 1987, we had a big drop after a five year rally to new all-time highs. This is a pattern that is repeated over and over again. There is an old saying, “If we don’t learn from history, we are doomed to repeat it”. Well, today we have been rallying for 6 years without a 10-20% correction and, if history is our teacher, we are overdue for a big drop. I am not saying the market is going to melt down tomorrow, just that the market has always corrected and the longer it goes without a significant drop, the bigger it tends to be when it comes. Therefore, it isn’t a matter of “IF” it is a matter of “WHEN” the correction is coming.

If you feel that the market will never drop 10-20% again, then you don’t need to read further. If, however, you feel that someday we will have another significant sell off of 10%, 20% or greater, you must have a plan in place. You see, most people forget that when markets drop, fear takes over and it becomes a self-fulfilling scenario. It starts slowly and you feel confident that it will pass. Then it goes down a bit more and you reassure yourself, then it doesn’t come back and you start to get anxious. Finally, it goes down more and you say, “I can’t take it anymore, I’m going to sell”, but by this time, the market is down 20% plus, and you are down even more. Once you are out, you worry about getting back in until it has fully recovered….and the cycle starts all over again.

Here is what I hope you take away from this discussion; since the market has always gone up and down, you must have a plan to limit your damage on the downside. Otherwise, you are at risk for making hasty emotional decisions that can cost you big over your lifetime. You also must have a plan for the upside as well. After all, nobody ever lost money by taking a profit (taught to me by one of my early mentors)! If you are not inclined to want this level of participation in your investments, then select investments that only need to be monitored occasionally. That means avoiding direct investments in stocks, commodities, bond mutual funds or other assets that can fluctuate in this manner. Helping you figure out your priorities and then crafting them into a plan is what we do for our clients. We then assist you in implementing strategies to help you succeed, using tools that fit your lifestyle, values and objectives. If you would like to schedule a complimentary consultation to see if we are the ones to help get you there, contact us here so we can talk about it.
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