How to Handle a Market Downturn

The last week and a half has been rough for investors. Everywhere you look there is dire market news. Like Chicken Little, it's easy to feel like the sky is falling. Here are my five tips on what to do when the market is taking a downturn:

Turn off the news

I have stopped watching market news, I read it instead. Reading the news takes out the emotion and drama that fills newscasts and sells programming. I've found I am better able to assess what is actually happening in the market and give better advice to my clients when I’m not channeling the fears of talking heads.

Several years ago I happened to be working from home and had the news on in the background throughout the day. Later that evening the idea occurred to me to consider gold as an investment. As the thought passed, I was shocked. That kind of thinking went against all of my education and background. I then realized that every commercial break throughout the day had ran an ad for a company urgently advising investors to buy gold (specifically from their company). It was at that moment that I really started to understand the power that media, even in the form of commercials, has on people.

Work on something you can control

There is absolutely nothing you and I can do to change China’s economy or the interest rates or what the market is going to do today.

I get it; when there’s so much bad news, you have to do something. So try working on other areas of your financials, things that are not investment related. Finish your estate plan that you’ve been meaning to do for years. Revisit your budget and look at how you’ve been spending money. Are your finances lining up with what’s important in your life? Spend your energy being productive by working on what you can control, instead of fretting about things that are out of your hands.

Identify what's important to you

Another popular way of saying this is “know your why”. Why are you invested in the stock market? What are your goals for that money? Many common objectives include ensuring you and your spouse are taken care of in retirement or helping children or grandchildren get through college. Know why you are investing and then focus on that.

Financial contentions are one of the leading causes of divorce in the United States. When the market goes south, it increases the stress in our lives, and many times this stress spills over into marriage and family relationships. Focus on these relationships during market downturns. Don’t become a statistic.

Keep a cool head

Don’t panic. A market downturn may be more serious than an acorn hitting you on the head, but it doesn't help anything to get your feathers ruffled like a certain frantic fowl. Of course, it’s easier said than done. If you’ve had a plan in place, your plan should be working even in a downturn. This is the time to assess if your plan is doing what it should when the market takes a dip.

Remember, there are seasons to everything and the season of this market downturn will pass like all the others. One of my favorite analogies of the stock market is pruning a fruit tree. In order for a fruit tree to grow and produce healthy fruit, it has to be cut back every year. It cannot grown untended and expect to be a healthy, mature tree for years to come. The same is true with Wall Street. Corrections and downturns are healthy for the stock market. They cause investors to reassess companies and filter out bad investments. Pruning is a painful process, but it is necessary.

Buy, buy, buy

Market downturns are the perfect opportunity to invest. The stock market is essentially on sale at times like these. Of course we don’t know where the market will go tomorrow, but when the markets return, whether that be in one day, one month or five years, you will have benefitted from taking advantage of the reduced prices.

Wealth is made by decisions made when the market is down. The investors who stay in the stock market and continue to invest, even when the news is bad, are the ones that will find the most success and end up wealthy.

If you haven’t followed these guidelines in the past, or even during the current market correction, I have specific advice for you. Think about what you would want to do differently next time. What will you wish you had known? Why was pulling out of the market a bad idea? What would have happened if you would have stuck it out?

Write a letter or note to yourself about what you wish you would have done in the past. Date it and keep it. Read it again when the market goes down to remind yourself of what you wish you had done differently. Even better, share this information with your financial advisor, your spouse or a close friend. Let them help keep you accountable.

One of the most important elements of investing is what you do or don’t do when the market falls. Making wise decisions now allows you to enjoy success in the future.