Are You Prepared for a Market Correction

Financial markets are subject to fluctuations, and while we can’t predict when a market correction will occur, preparing for it is crucial to shield your investments and stay on track with your retirement goals.

In this article, I outline strategies we use to help you prepare your finances for the next market correction.

Assess Your Risk Tolerance

A person’s ability and willingness to tolerate changes in the value of their investments is referred to as their risk tolerance. It’s an important consideration while choosing the right investment plans. Determining your level of risk tolerance requires a thorough assessment of your age, income, and time horizon.

Time in the Market, Not Timing the Market

It’s best to avoid making investment decisions based on emotions. The principle of “time in the market, not timing the market” is essential for long-term success. Research by Schwab Center for Financial Research reveals that bad market timing is worse than investing immediately, regardless of market conditions. Even in downturns, those who invest immediately and stay invested tend to fare better than those attempting to time the market.

Schwab’s findings show that a fully invested portfolio over 19 years earns significantly more than one with poor market timing or staying in cash—approximately $14,000 and $91,000 more, respectively. While perfect timing may yield the best results, it’s impossible to achieve, making immediate investment the next best strategy.

Additionally, compounded interest amplifies these gains over time, emphasizing the importance of staying invested despite short-term fluctuations. Missing just the 10 best days in the market between 1994 and 2023 could reduce returns by 54%, according to Hartford Funds and Morningstar. Missing the 30 best days could slash earnings by 83%, underscoring that staying invested is critical to capturing market rebounds and long-term growth.

The time value of money highlights that a dollar today is worth more than a dollar tomorrow. Remaining invested increases your chances of weathering market fluctuations and achieving growth over time.

Diversify and Rebalance Your Portfolio

Diversification and regular rebalancing are key strategies to manage risk and maintain a healthy portfolio, especially during market corrections. Diversification involves spreading your investments across a variety of asset classes, industries, and geographic locations to minimize the impact of poor performance in any one area. For example, investing in a mix of stocks, bonds, and cash equivalents can lower portfolio volatility and enhance long-term growth potential.

Rebalancing complements diversification by keeping your portfolio aligned with your goals and risk tolerance. Over time, some investments may outperform others, causing your asset allocation to shift. Rebalancing involves selling portions of overperforming asset classes and reinvesting in underweighted ones to restore your intended allocation. This disciplined approach helps manage risk and keeps your investments on track, even during market fluctuations.

Maintain a Cash Reserve

An essential component of financial stability is keeping a cash reserve. This emergency fund serves as a safety net, giving you a buffer to pay for unforeseen costs like house repairs, medical bills, or job loss. For those nearing retirement, we advise keeping one to two years’ worth of living expenses in your emergency fund. In addition to providing comfort, this liquid reserve eliminates the need to sell investments during a market correction.

The most important thing about an emergency fund is accessibility. The money should be freely available without any conditions or penalties. It’s crucial to stay away from investing your emergency money in securities with longer lock-up times. Prioritizing liquidity and keeping a sufficient cash reserve can help you safeguard your finances against market corrections and life’s unexpected obstacles.

Here to Support You

Market corrections are a normal and expected part of the investment journey. Partnering with a Certified Financial Planner® professional who is a Fee-Only Fiduciary can help you develop a strategy designed to navigate market fluctuations and stay on track toward your goals.

At Black Walnut Wealth Management, we work to help you make informed investment decisions, so you can approach retirement with clarity and peace.

Schedule a 15-minute introductory meeting by calling us at (231) 421-7711 or using our online calendar.

Recent Insights from Black Walnut Wealth Management