7 Ways to Prepare for a Market Pullback Before it Happens
contributed by Jeff Dobyns
Is the best time to react to a market drop when the headlines and pundits are screaming gloom and doom? Of course not! The best time to do it is in advance. During the past weeks of market volatility, I am reminded of my commitment to some sound, prudent and useful lessons that I’ve learned in nearly two decades of this business. While some investors head into duck and cover mode, I spend time with my clients on these 7 steps, so they are well positioned to weather any market decline.
- Have a huge emergency fund. Socking away a sizable amount can make you more confident. The amount you should have in savings depends on your comfort level. For some of my clients, it is 6 months of living expenses. For others, it is 24 months. Your number ultimately relies on your financial situation and personal comfort level. I always advise to err on the side of having more cash than you think your need. Having a couple years’ worth of living expenses in your savings account makes sticking through a market decline much easier.
- Reduce debt. If you have no mortgage and no leverage (borrowed money) you can reduce the impact the market has on you. You won’t always be making money in the short term, but when you borrow money, you always pay more when you’re paying it back…
- Buy low. If you buy when things are undervalued, you should be able to get ahead of the game. Warren Buffett, the most successful investor in the world, says “Be greedy when others are fearful and fearful when others are greedy.”
- Diversification is critical. Proper diversification can be more important than anything else. Timing, fund selection, your money manager – I believe they’re all secondary to a diverse portfolio.
- Allocate appropriately ahead of time. It is important to be properly diversified BEFORE the market declines. When stocks are dropping in value, it’s too late.
- Hire a proactive financial planner. You want someone to oversee your portfolio who takes a proactive approach to the management of your account and overall finances. For instance, while it is never ideal for the market to drop, when it inevitably does, a proactive planner should be reaching out to clients about tax loss harvesting, the process of selling investments with unrealized losses in non-retirement accounts to capture the loss for tax write-offs. While you cannot invest the funds back into the same investment for 30 days, this money can be immediately reinvested in a different investment so you are not sitting on the sidelines in cash if the market recovers.
- Develop a plan. When you take the time to define your goals, you’ll be able to identify how much risk you need to take. The best part about having a plan is that you won’t take more risk than necessary.
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Jeff Dobyns and not necessarily those of Raymond James. Investing involves risk and investors may incur a profit or loss regardless of strategy selected. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, and time horizon before making an investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Past performance is not a guarantee of future results. Diversification and asset allocation do not ensure a profit or protect against a loss. You should discuss tax matters with the appropriate professional.