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How to Use Market Corrections to Boost Your Portfolio

Aug. 26, 2015
How to Use Market Corrections to Boost Your Portfolio
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By Brian McCann

Learn more about Brian on NerdWallet’s Ask an Advisor

This time last week, I added an item to my to-do list: Start writing my next client note. The topic was going to be “Sideways Markets Can Be Difficult to Deal With, Too,” or something to that effect. What a difference a week makes!

Of course, now I’d like to talk about how to deal with market corrections. When I talk with investors during turbulent times, I offer two basic pieces of guidance:

  1. Try not to panic
  2. Work your strategy

Let’s take a look at each individually.

Try not to panic

Market corrections and bear markets are a natural part of the investing cycle. When dealt with correctly, these downturns can actually help boost your portfolio.

Unfortunately, the human brain is wired with a flight-or-fight response. When we see all the red in our portfolio, it sets off alarms in our head, and we feel the need to do something to alleviate the pain. When we are in this state, the rational, long-term-focused part of our brain can become overwhelmed, and we make bad decisions.

So take a break. Don’t watch financial TV. Play with your kids. Go for a walk in the woods. Anything that can help you reset to a more reasonable frame of mind. An advisor and blogger I follow has a really interesting method of dealing with the psychological difficulties of down markets: He starts looking for really “absurd” deals on good stocks.

Which brings us to the next point…

Work your strategy

I manage diversified asset allocation accounts for my clients. Many investors pursue a similar strategy in their personal or workplace retirement accounts. We built these plans during less turbulent times with an appreciation of the volatility that we would inevitably encounter during an investment cycle.

Now is the time to let the strategy do its work. If it’s time for you to rebalance your accounts, this may lead to some uncomfortable moves, like selling your more stable bonds to buy stocks that have fallen. But that is part of the strategy. Those low-yielding bonds that have pulled down your returns for the past five years are now going to do their job: provide you with the means to purchase beaten-down stocks.

Remember that during market drops, you have a strategy and you are prepared for a bear market.

Then go for a walk.

This article also appears on Nasdaq.

Image via iStock.

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