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If you are familiar with the “buy and hold” strategy (some firms swear by this, and might have already fainted after reading the title of this article), then selling when there’s a market correction – a 10% or more decline in the market, can really put a dent in that plan.
But when is it ok to sell your investments during a market downturn? It’s important to remember you should take these scenarios on a case-by-case basis, and know that everyone’s situation is different.
It’s a good idea to consult with your financial advisor and tax professional before making any drastic changes to your portfolio. We’ll run down a few scenarios below.
Major life changes
If you’re getting close to retirement and might be turning on your income stream from your investments to fund your retirement, it might be a good time to sell, or at least reassess your investment mix prior to retirement.
Marriage, divorce, career changes are also examples of life events when you might consider having a portion of your portfolio in cash.
Short-term cash needs
If you have an event on the horizon where you might need cash, it might be a good idea to move that portion of your investments to cash. Good examples might be buying a house, paying for college, wedding expenses, etc. These short term expenses can usually be planned for in advance, so ideally you’d like to keep these savings goals separate from your long term investment goals so you won’t have sell investments during a downturn.
If you don’t need your investments to grow
Some investors might not need their investments to increase in value in order for them to achieve their financial goals. When you invest for long-term growth, you are going to take some amount of downside risk. If there is no need for growth, there is not much reason to take on that risk of loss. Consult with your financial advisor if you think you might fall into this segment of investors.
When it’s affecting your sleep at night
If you are glued to CNBC at 2 am wondering how you will ever recover from this, then maybe it’s a good time to get out and reassess. Some investors care more about not losing money than they do about earning money when the market is up. If that’s you, and you value a good night’s sleep, then talk with your advisor about your fears during a market correction.
A good financial advisor will prepare you for these market corrections, because they are inevitable. No one knows when a corrections is going to happen, but they ARE GOING TO HAPPEN at some point.
Go over your plan of action with your advisor so you know what the plan is before there’s a correction, so when the time comes, you can relax knowing you are following your “market correction plan.”
If you don’t have a plan of action to take during a financial downturn, fill out the form on the right and we’d be happy to talk about how we handle them with our clients.