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Marc A. Hebert's Money Sense: Advice to help you, your portfolio survive market turbulence

February 23. 2018 8:11PM

Most stock market investors are looking for the same result: strong and steady gains on their investments. Dealing with a period of sustained falling stock prices is not easy. All too often, investors react to a sharp drop in prices by panic selling or digging in their heels, despite deteriorating market fundamentals. 
But more shrewd investors see a correction or a downturn as an opportunity to review the risks in their portfolios and make adjustments where necessary.

When confronted with any adverse market event — whether it is a one-day blip, a more lengthy market correction, or a prolonged bear market — take time to review your portfolio. Stomaching volatility can be difficult.

Here are some suggestions to help you and your portfolio survive market turbulence.

• Have a well-thought-out investment plan. A plan will guide you through various market conditions and, if it is truly well thought out, it will be easier to stick with during market drops.

Review whether your allocation properly reflects your risk tolerance. Don’t let fear lead you to impulsive behaviors and knee-jerk reactions. These are dangerous when it comes to your investments. For reassurance, consider how markets have reacted in the past to drops. While past performance is no guarantee of future results, if you pull up a historical performance chart of the Standard & Poor’s 500 Index, you can see how the market has reacted to downturns.

Keep a long-term perspective because the market will always experience ups and downs. If there is one certainty that history has shown us about the stock market, this is it.

Understanding that ups and downs are an inherent component of the market is why it is important to keep emotions in check and stay focused on your financial goals. A buy-and-hold strategy — making an investment and then holding on to the position throughout short-term market moves — can help. The opposite of buy and hold investing is market timing — buying and selling investments based on what you think the market will do next. Market timing, as most investment professionals will tell you, is risky. If your predictions are wrong, you could invest when the market is on its way down or sell when it is on its way up. In other words, you risk locking in a loss or missing the market’s best days.

• Diversify your assets. If you have a large percentage of your portfolio in one investment, a bad stretch for that particular investment could sink your portfolio by a significant percentage. A diversified group of investments will help cushion market activity.

• Look for buying opportunities. A market decline might bring with it the opportunity to buy great long-term investments. Do your research carefully and you might find some market gems.

• Talk with a professional. A financial professional can help you separate emotionally driven decisions from those based on your goals, time horizon and risk tolerance.

Researchers in the field of behavioral finance have found that emotions often lead investors to read too much into recent events, even though those events might not reflect long-term realities. With the aid of a financial professional, you can sort through these distinctions. You’ll likely find that if your investment strategy made sense before the crisis, it will still make sense afterward.

It is important to remember that periods of failing prices are a natural part of investing in the stock market. While some investors will use a variety of trading tools, including complex derivatives, to hedge their portfolios against a sudden drop in the market, perhaps the best move you can make is to re-evaluate your portfolio’s overall risk level and stay focused on your long-term goals.

Marc A. Hebert, M.S., CFP, is a senior member and president of the wealth management and financial planning firm The Harbor Group of Bedford. Email questions to Marc at Your question and his response might appear in a future column.

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