Using Market Corrections to Evaluate a Portfolio

Witnessing significant sell offs in major U.S. indices, as well as long periods of upward movement in the market are opportunities to learn about retirement planning and evaluate your portfolio. Here are a couple things that market corrections can give insight into, so you are better prepared to be a long-term investor and plan for retirement.

Is Your Risk Appropriate?

During times of market growth many of us become over confident and may be investing more aggressively than our timeline or risk tolerance would normally suggest. You may consider selling some of your holdings or even call your broker for advice. These are signs you may be too aggressive in how you’re investing. Everyone wants to participate in great market returns. One of the most difficult tasks for an advisor is counseling clients with conservative or even moderate risk tolerances during times of great market growth.

It is difficult to see headlines that tout the market climbed 35% and see “only" 12% in your own account. Knowing this, many investors tweak their tolerance to higher risk levels during good times, often against the advice of advisors. This can be very dangerous over the long term as we have seen throughout market history by those who could not afford the losses they experienced in 2008 or even earlier during the tech bubble. (For related reading, see: The 2007-08 Financial Crisis in Review.)

Bull Markets Can Create Overconfidence

During bull markets many people find they are doing just fine as a DIY investor. There are so many options available today for the armchair investor to choose from and that can make things easier, maybe even cheaper to simply choose to do it yourself. What strong almost straight up bull markets can also do though, is create overconfidence. Are you paying attention to when there are sell offs or are you trusting popular media coverage? While passive investing can work very well in bull markets, your inability to actively monitor your investments could have dire affects on your portfolio and your plan.

Do you have time to dissect earnings reports, listen to economists and attend seminars run by some of the top financial minds in the country? If you work full time, this might be impossible so an independent advisor is a good resource in times of crisis.

Create a Plan

Do you know how much you need and when you can retire? I had two clients come in to discuss their future retirement and what they would need to save to make it happen. They told me they saved as much as they could. More often than not, when clients believe this, they haven't saved enough. In the end we found that they had accumulated enough money to effectively retire in five years. Their current investment mix was very aggressive, which means they were taking risk they didn’t have to, and putting their retirement in jeopardy in a market decline. If they had created a plan, they would have been better prepared for a market correction.

Market corrections are healthy and show a good diverse group of opinions on the health of a market. Align your investments with your goals to better prepare for retirement. With a few simple steps, you can be in a better position to realize your dreams. (For more, see: How to Adjust Your Portfolio in a Bear or Bull Market.)