History lessons for managing Market Mishaps: 10 things you can do

By Steve Lowrie, CFA

Special to the Financial Independence Hub

If there’s a consolation prize for growing older, it’s that we get to learn an increasing number of history lessons first-hand.  Take, for example, my past post on lessons from the 2008–2009 bear market:  “What Should I Do – or NOT Do – During the Next Bear Market?”  One suggestion I made for when the next bear came along (now here), was to revisit the article and review the lessons history has to offer us … if only we will heed them.

Good idea.  The circumstances precipitating each event may vary, but the abiding lessons remain relevant every time.  Continuing the theme, today’s post combines a two-part series revisiting 10 points on how to navigate down markets and economic crises.

Since most of us prefer action to idleness, we’ll first cover the following five actions you can take to help. In part 2, right below Part 1 here on the Hub, we’ll cover five things not to do in troubled financial times.

#1:  Simplify

It’s hard to remain calm in turbulent times, when everything seems to be happening at once.  To help, try embracing simplicity, in your life and your financial plans.  That’s not always so easy!  Here are two pieces to assist:

Why Simplicity Beats Complexity

Simple Investing Isn’t Easy

#2:  Trust the evidence to avoid “the big mistake.”

Every investor yearns to buy low and sell high.  But many end up doing just the opposite in a crisis, assuming, “this time, it’s different.”  Here’s a post on using evidence-based history to avoid making this big (if common) mistake:

How Evidence Based Investing Saves Long-Term Wealth by Avoiding the Big Mistake

#3:  Control the controllable

When the world around us seems especially chaotic, it can feel as if we have no say over anything.  There are some greater forces we must leave to fate, but disciplined portfolio management needn’t be one of them, as described in this important January 2019 post:

The Best Year-End Commentary Almost Never Published

#4:  Rebalance back to plan 

Among the most important “controllables” is sticking to your personalized investment mix by rebalancing your portfolio back to plan during down markets. Because this typically calls for selling excess bonds and buying low-priced stocks, rebalancing can feel scary and counterintuitive at the time. Here’s a piece on why it’s still a sensible thing to do:

Rebalancing in Down Markets: Scary, But Important

#5:  Maintain an adequate lifestyle reserve

So, this last one was much better completed in advance.  Still, it’s worth using the current crisis to see how you feel about past efforts:  Are your current lifestyle reserves enough for now?  If the answer is no, make a note to revisit this piece in the future … for next time.

Using a Lifestyle Reserve to Ride Out Market Storms

Above, I revisited five “history lessons” covering what investors can do in troubled times. Now I’ll share five more thoughts on what not to do during down markets and economic crises. These are based on what we’ve learned from experience.  The circumstances precipitating each crisis may vary, but the abiding lessons remain relevant every time.

So, without further ado, here’s what not to do as an investor:

#6:  Don’t try to market-time

Why not try to get out of a down market before it’s hit bottom?  For one, you can only identify a recovery in hindsight, after it’s too late to participate in the recovery.  (For all we know, we’ve already hit bottom this time after the March 23, 2020 panic sell-off.)  Here’s a post that covers this and three other reasons to avoid market-timing:

Is It Time to Time the Market … This Time?

#7:  Don’t try to pick individual stocks

In declining markets, a well-diversified portfolio is likely to decline a bit too, tempting some to concentrate on individual securities that seem more promising.  Again, the real winners and losers are only obvious after the fact. This piece demonstrates how abandoning a globally diversified stance is like removing your safety helmet mid-game.

Should Investors Buy Individual Stocks?

#8:  Don’t ditch your investment allocation

Once you’ve allocated your investments to an appropriate mix of stocks/bonds, there are times it may make sense to revisit that mix. Abandoning your carefully crafted asset allocation out of fear or panic is not one of those times.

Three Times You Might Want To Change Your Asset Allocation

#9:  Don’t chase past performance 

If you’ve heard it once, you’ve heard it a million times: Past performance (good or bad) does not predict future success (or failure). This is because “the market has no memory,” as Dimensional Fund Advisors’ David Booth explains in this reflection from January 2020.

The Market Has No Memory

#10:  Don’t believe everything you hear; first, analyze it

Especially in times of increased uncertainty, investors are often exposed to an overload of inappropriate “advice.”  This piece covers how to assess a strategy’s basic odds for success or failure; it may help you keep your financial cool when others are losing theirs.

How Understanding Statistics Can Make You A Better Investor

Steve Lowrie holds the CFA designation and has 25 years of experience dealing with individual investors. Before creating Lowrie Financial in 2009, he worked at various Bay Street brokerage firms both as an advisor and in management. “I help investors ignore the Wall and Bay Street hype and hysteria, and focus on what’s best for themselves.” This blog originally appeared in two instalments on his site on April 16, 2020 and April 20, 2020 and then again in June 2021, and are republished here with permission.

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