No one can predict the future, but investors can take steps to protect their portfolios during a market downturn カヴァン・ チョクシ. Knowing what to expect during a market downturn and how to prepare for one can increase your chances of staying invested through the cycle. This article will provide an overview of managing portfolios in a market downturn.
What is a Market Downturn?
A market downturn is typically measured by the percentage decline in the S&P 500 (SPX) or an index that tracks your geographic location. When evaluating whether a market decline is significant enough to constitute a “downturn.”
The first factor to consider is how much a decline you can stomach. If you have a large portfolio and you aren’t emotionally invested in it, a 10% decline might not bother you at all. On the other hand, if you are younger and accumulating capital for the first time, a 10% drop might seem like the end of the world. The second consideration is how long your portfolio has been invested, as well as its current size. A short-term portfolio with a small capital portfolio probably doesn’t need to be concerned about short-term market volatility. However, longer-term portfolios that feature larger amounts invested might want to take steps to protect themselves.
The bottom line is that your risk tolerance should dictate how well you weather the storm during a downturn. Setting up cash reserves, ensuring proper asset allocation, and diversification help you prepare for a downturn. It is also helpful to understand the difference between corrections and bear markets.
What Is The Difference Between A Correction And A Bear Market?
A correction occurs when the market drops 10% or more from its previous peak, but it can bounce back up within two weeks. Conversely, a bear market occurs when it declines more than 20% from its previous high. Bear markets typically last a year or longer.
What Causes a Market Downturn?
Many causes can be attributed to a market downturn. Inflation, recessions, and geopolitical events all can cause a decline in the markets. Here are some common causes of a market downturn:
- Inflation – Too much money is being created by central banks. This causes assets to become inflated and less attractive for investments.
- Recession – A decline in economic activity leads to a decrease in demand and results in lower prices.
- Central Bank Policy – Decreasing the money supply by hiking interest rates or other means. This causes asset prices to drop as investors see less incentive to hold them.
What Can Investors Do to Protect Their Portfolios?
Investors who are worried about a market downturn should take these steps to protect their investments:
- Using cash reserves – These can be used as collateral for short-term speculation. If needed, they also protect to fund the early stages of capital accumulation.
- Ensuring proper asset allocation – Ensure that your portfolio is diversified enough so that any one asset can’t “hurt” your portfolio.
- Selling long-term holdings – If you sell them, you will not have to worry about any further declines within that time frame. This is typically done by the wealthy who plan to hold cash for short-term opportunities instead of holding those assets in their portfolios.
A market downturn is a difficult time for investors. However, they can do things to protect their portfolios and minimize losses.