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How to Prepare for a Stock Market Decline

There are several things you can do to better assure your portfolio is allocated appropriately in the event the stock market declines.

  • My first rule of thumb is that any money that you are going to need in the next five years should not be in the market. “Short-term” money should not be at risk of value fluctuation.
  • Confirm your true risk tolerance. Many people feel they have a high risk tolerance when the market is going up but soon find out their real risk tolerance is much lower when they see the value of their accounts declining. Your true risk tolerance has nothing to do with current market conditions. Instead it is the level of risk you are comfortable with regardless of market fluctuations. Keep in mind, typically the investments that offer great potential for high returns also offers the potential for greater risk. Be sure your portfolio is aligned with your true risk tolerance before a declining market and do not make drastic changes during or after a market decline.
  • Rebalance your portfolio now and at least semi-annually. Here’s how it works and why it is so important. Let’s say for example you originally decided you should have 20% of your portfolio in large cap growth stocks. If you did that a year ago your portfolio most likely now has a higher percent in large cap growth stocks, let’s say 24%. Consider skimming off the extra 4% now and transferring it to the asset class(s) that has underperformed. By doing that you not only sell high and buy low but you also may be reducing the risk to your overall portfolio.

Re-align your portfolio now and at least semi-annually to better align your portfolio for potential adverse market conditions

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