Financial markets are inherently volatile. Because of this inherent volatility, periods of growth and downturns are always followed by corrections. Although the timing of a market correction is unpredictable, being ready for one is essential for safeguarding your investments and preserving your retirement goals.
In this article, I share tips for preparing your finances for the inevitable market correction.
Assess Your Risk Tolerance
A person’s ability and willingness to tolerate changes in the value of their investments is referred to as their risk tolerance. It’s an important consideration while choosing the right investment plans. Determining your level of risk tolerance requires a thorough assessment of your financial status, investing objectives, and emotional reaction to market fluctuations. Risk tolerance is greatly influenced by variables including age, income, and time horizon.
It’s critical to keep in mind that risk tolerance is not static. Over time, changes in financial goals and life circumstances may call for modifications to your investment strategy. Regularly reevaluating your risk tolerance verifies that your portfolio is in line with your evolving needs and priorities.
Diversify Your Portfolio
The goal of diversification as an investment strategy is to lower risk by spreading out investments among a range of businesses, asset classes, and geographical areas. It’s the opposite of placing all your eggs in one basket when it comes to money. You may be able to lessen the effect that the performance of any one investment has on the performance of your entire portfolio by distributing your assets among several securities.
Making investments across several equities, bonds, real estate, and cash equivalents is an example of diversification. Further improving diversification can be done by making investments across different geographic locations or other stock market sectors. There are several perks to diversification, particularly in times of market correction, including lower portfolio volatility, better risk-adjusted returns, and more long-term growth potential.
Review and Rebalance Your Portfolio
Maintaining your financial health and reaching your long-term objectives requires routinely monitoring and rebalancing your investment portfolio. Through regular evaluations of your portfolio’s performance, asset mix, and risk profile, you can alter your investments in a way that aligns with your changing financial goals. In order to accomplish balance, you must compare the existing holdings in your portfolio to the intended asset allocation, identify any notable deviations, and take appropriate action to bring the portfolio back into line.
Rebalancing usually means selling some of the better performing asset classes and putting the money raised back into the lower performing ones. This strategy lessens the effect of market corrections and helps avoid undue exposure to any one asset. Reviewing your portfolio also gives you a chance to reevaluate your time horizon, financial goals, and risk tolerance, verifying that your investing approach stays in line with your overall plan.
Maintain a Cash Reserve
An essential component of financial stability is keeping a cash reserve. This emergency fund serves as a safety net, giving you a buffer to pay for unforeseen costs like house repairs, medical bills, or job loss. We advise keeping six to twelve months’ worth of living expenses in a high-yield savings account close at hand. In addition to providing comfort, this liquid reserve eliminates the need to sell investments during a market correction.
The most important thing about an emergency fund is accessibility. The money should be freely available without any conditions or penalties. While generating interest and maintaining liquidity can be balanced in high-yield savings accounts, it’s crucial to stay away from investing your emergency money in securities with longer lock-up times. Prioritizing liquidity and keeping a sufficient cash reserve separate from investment accounts can help you safeguard your finances against market corrections and life’s unexpected obstacles.
Stay Informed but Avoid Panic
Keeping up with financial market corrections is essential to keeping a clear head and choosing wisely while investing. It’s critical to keep abreast of economic and financial developments, but it’s just as critical to avoid excessive dread and panic.
You can distinguish between short-term swings and long-term trends by keeping an eye on market conditions without giving in to your emotions. Doing this makes it easier to avoid making snap decisions that could undermine your investing objectives when you are aware of the market’s typical ups and downs.
We Can Help
Our team at Bernath + Rosenberg is here to guide you through any market uncertainty. With our Certified Public Accountants and CERTIFIED FINANCIAL PLANNER™ professionals, we stay current with the latest market trends.
To get started and make the most of your hard work, schedule a meeting by calling (212) 221-1140 or email tstricker@brwealth.com.
About Ted
Ted Stricker is a partner and financial advisor at Bernath + Rosenberg, a full-service accounting, tax, and wealth management firm with offices in Monsey, NY, Lakewood, NJ, Cedarhurst, NY, and Miami Beach, FL. The firm demonstrates a personalized approach to custom-tailored solutions and an unwavering commitment to client service. With over 26 years of experience in the financial services industry, Ted manages the firm’s wealth management team, and specializes in designing financial plans for business owners and affluent families. Since joining the team in 2015, he provides practical and sound advice, combining innovative approaches and solutions that reflect clients’ personality, lifestyle, and goals.
For the ninth year in a row, Bernath + Rosenberg has been named as one of the leading CPA firms in financial planning by Accounting Today, a publication that receives hundreds of submissions each year and features the Top 150 Firms in the nation. Ted is a CERTIFIED FINANCIAL PLANNER™ practitioner and is a member of the Financial Planning Association. To learn more about Ted, connect with him on LinkedIn.
