On this week’s episode of Tape Talk, we talk all about pullbacks in the market. In every healthy market, investors see and live through healthy waves of rotation and correction before the next leg higher. With months of market gains behind us it begs the question of whether or not investors should be preparing themselves for volatility ahead.
Understand Your Risk
The first step in your pullback action plan should be understanding what you have at risk in your investments. Have you set aside enough cash to meet your immediate financial needs without stressing about small market moves? Do you (or your advisor) have pre-determined risk levels on your investment positions? Do you understand the risk associated with your selected allocation level? These are all important questions to be asking when the market is near highs, not in the midst of a correction.
Revisit Your Allocation
The stock market has experienced some significant gains over the past year. Have you and your advisor reviewed your account to ensure your allocation still meets your target? As your investments move it’s normal for your allocation to drift. This is why you need to review and rebalance accordingly on an annual basis to ensure your actual allocation lines up with your desired allocation. Having an over-allocation in any asset can be great when it’s moving higher but may be tough to stomach when it goes through a healthy correction.
Have A Plan
What’s the plan for the investments you own? Are you in a long-term accumulation phase and dollar-cost averaging every month? Are you approaching retirement and need to curb the volatility in your portfolio? Have you run your financial plan to determine your required rate of return and understand what it will take to get there? Investing is not a guessing game, it may feel easy when the market marches constantly higher but, when pullbacks come, your plan can act as the foundation for the decision that need to be made.