5 Steps to Take When the Market Tanks

It's official.  As of today the stock market has had a "correction" (a decline in price of over 10%).  What do you do? Here are 5 recommended steps you can take. 

1. Don't Panic

If you sell in a rush to get out of a down market, you could end up missing some big gains when it comes back. The field of behavioral finance has proven that people make poor investment decisions when they are driven by their emotions. Stay calm and keep your focus on your long-term goals and your overall investing plan

2. Rebalance

A well-diversified portfolio gives you an opportunity to take advantage of a stock market correction. With a mix of stocks, bonds, cash, and alternative investments, you can rebalance your overall portfolio opportunistically. Stocks are now "on sale."  If you find that your allocation to stocks is beneath your long-term target, you have an opportunity to buy on the cheap to get back up to target. 

3. Be Contrary

Billionaire investor Warren Buffet is famous for saying that it is best to be “fearful when others are greedy and greedy when others are fearful.” The basic principle is that the future return of stocks is directly related to their current prices.  When prices are down, future returns are up, at least for long-term investors.  That's the clear lesson from market history.  

4. Harvest Losses

A stock market correction may mean that some of your positions are priced below what you paid for them (their "tax basis").  That may give you an opportunity to make some lemonade from the market's lemons.  You can offset up to $3000 in ordinary income against realized capital losses, saving you at (next year's) tax time.  Any losses over that amount can be carried over into future tax years.  

5. Seek Expert Advice

If you’re tempted to jump out the window, it may be time to talk to an experienced investment advisor who can provide perspective and counsel. Speaking with a professional can give you peace of mind during market turbulence.