As of late July (2023), the S&P 500 is up almost 20%. This year has been surprising to many in that inflation has trended down while the economy has remained strong. While we might not be out of the woods yet, many are no longer predicting a recession for the end of the year. So while you’re enjoying seeing some of your investments make a comeback, it’s also time to consider how you did over the last year and what you may want to shore up before the next downturn.
No news doesn’t sell
While it’s still fresh in your minds, consider the news you’ve been hearing for the past year. So many stories on the coming recession, how there was no chance of a soft landing, and others questioning if the Fed had gone far enough or too far. Kind of like early Covid stories. Hopefully if you’ve experienced a bear market before, you’ve heard this and learned to take it with a grain of salt. However, if you haven’t this is a great learning experience. The experts don’t know what they don’t know, but no news doesn’t sell. Remember this the next time you hear report after report that the sky is falling.
How did you react?
In the depths of the bear market, when it seemed nothing could stop runaway inflation, what did you do? Some people chose to ignore the market and kept investing as usual (perhaps in a retirement plan). Others used excess funds to buy stocks that were on sale. And unfortunately, some people sold at the depths and still haven’t reentered the markets, in effect locking in their losses.
Whatever you did, it’s time to check your investments
Similar to heading out to see the damage after a particularly nasty thunderstorm, it’s time for you to see how your financial house held up to the down market. Take a look at the performance of your stocks and funds during the crash. Did they decrease less than the overall market, indicating relative strength? Or did they drop even more than markets as a whole? It’s essential to evaluate whether your investments reacted in line with market trends to help you determine if your portfolio needs some adjustments.
Are you still aligned with your stated goals and plan?
Now that you’ve reviewed your portfolio, it’s time to revisit your investment goals. What were you hoping to achieve when you first entered the wild world of stocks? Maybe you were saving for a second home, but now you realize you should put more every month into your retirement accounts. Make sure your investments are aligned with your current goals.
Are you as comfortable with risk as you believed?
Your risk tolerance is crucial in reevaluating your investment strategy. If you found yourself losing sleep over every stock market hiccup, it might be time to adjust your risk level. But remember to consider your investment horizon. If you are planning to retire next year you will most likely have a different comfort with risk versus if you have 20 years or more to invest.
Do you need to make adjustments?
Evaluate the impact of the market crash on your asset allocation. The stock market crash has likely had a significant impact on your portfolio’s asset allocation. Take a moment to assess how different asset classes, such as stocks, bonds, and cash, have been affected. Determine if your current allocation still aligns with your risk tolerance and long-term goals.
Rebalance your portfolio to optimize diversification. Diversification helps protect your portfolio from the whims of the market. After a crash, some investments may have taken a harder hit than others. Consider rebalancing your portfolio to ensure it remains properly diversified. This means selling some of the assets that have performed well and buying more of the ones that have underperformed.
Are we out of the woods?
The aftermath of a crash can be a roller coaster in its own right. Sometimes it takes years for the market to recover, and other times it quickly bounces back. The key is to stay calm and take the necessary steps to protect yourself and your investments.
How I reacted
This is – by my count – the fifth major downturn I’ve experienced since I started investing. While it’s not as difficult to handle as when I was younger, it’s still stomach-churning to see your investments drop by 20% or more. I kept an eye on several quality ETFs and purchased more shares over time. This reduced the average price paid, so I’ve seen a quicker positive response over the last few months as markets have turned. I also moved a significant part of my money into a high-yielding money market fund instead of keeping it in a lower-earning savings account.
Reevaluating your investments after a stock market crash is crucial for adapting to the changing market landscape and mitigating future risks. Remember to analyze individual stocks and funds, stay updated on market trends, and diversify your assets accordingly. Additionally, consider exploring investment opportunities in a post-crash market and developing an investment strategy that accounts for market volatility. By following these steps, you can position yourself for long-term success and navigate future market challenges with confidence.
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