Are you more prepared for a down market than you think?

Published May 14, 2020
 A couple reviewing their investments with a financial advisor.

During times of market volatility, it's normal to feel anxiety or the need to do something. First and foremost, it's critical to take care of your physical health. But your thoughts may also be turning toward your finances, and you might be asking yourself – is my strategy still OK? Am I prepared to navigate this, or do I need to make any adjustments?

Whether or not you feel you've prepared for a down market from an emotional perspective, you may have already prepared from a financial perspective. During periods of market volatility, it's important to remember that when you work with your Edward Jones financial advisor we recommend: you develop a strategy based on your goals and comfort with risk; you establish a diversified portfolio, designed with a purpose; and you have someone to help guide you through this.

You develop a strategy based on your goals and comfort with risk.

When we develop a financial strategy, it begins with what you are trying to accomplish. We consider your goals, income needs and comfort with risk to tailor a strategy specific to you. As part of this process, we select a portfolio objective and an asset allocation (your mix of stocks and bonds) based on both the expected return and expected risk that we believe is necessary to help reach your goals. It is also based on your comfort with risk, as a strategy is only as good as your ability to stick to it in both good and bad times. Having balance can better equip you to navigate through a down market and ensure a decline does not completely derail your strategy, while still providing for your needs over time. So, an important step is to first review your goals, and then we can ensure your allocation is still appropriate based on these goals.

A balanced allocation can help reduce the impact of -declines, while still providing for your goals over time

 A Balanced Allocation Can Help Reduce the Impact of -Declines, While Still Providing for Your Goals Over Time
Source: Morningstar. Through 3/31/20. Balanced Growth & Income Portfolio is composed of: 4% cash; 38% Investment-grade bonds; 4% high-yield bonds; 4% international bonds; 17% Canadian large cap stocks; 3% real estate, 11% U.S. large cap stocks. 7% developed overseas large-cap stocks; 3% U.S. small- and mid-cap Stocks; 1% developed overseas small- and mid-cap stocks; 3% emerging markets stocks.

How to read this chart

This graph compares the average annual return of the S&P/TSX Composite index against that of a balanced growth and income portfolio (see Source below the graph for the portfolio's composition) during two recent down markets. In 2020 (through March 31, 2020) the balanced portfolio had an annual return of -6.90% while the S&P/TSX Composite index stood at -20.90%. In 2008, the balanced portfolio had an annual return of -10.92% while the S&P/TSX Composite index stood at -33.00%. Taking all the average annual returns into account for the past 15 years, the balanced portfolio had a 6.01% annual return outperforming the S&P/TSX Composite index 5.19% return.

You establish a portfolio, designed with a purpose.

As we tailor a portfolio, we know that investments don't all behave the same way at the same time. And, importantly, each investment within your portfolio serves a valuable purpose.

During a downturn, your emotions may tell you to make changes and potentially sell stocks, but stocks are there to provide for growth and ultimately help provide for your income in retirement. So if you are depending on your portfolio for your income needs today, your current income needs should be addressed by your cash and short-term fixed income in your portfolio, which can also provide time for the stocks in your portfolio to recover.

After ensuring you have enough cash to provide for your near-term needs and emergencies, don't feel the need to carry too much cash. In fact, now may be the time to rebalance your portfolio, using this as an opportunity to add more to your stocks when they are down in value. How much you add to rebalance should be based on your portfolio objective. If you don't have enough cash on hand, now is the time to look at your budget and your outside sources of income to see if you can cut spending down to your necessities and build your cash reserve over time.

You have someone to help guide you through this.

While we cannot control the markets or the current environment, you can control something much more important for your long-term success – your emotions. So, before you consider making changes in a down market – talk to your financial advisor. Together you can review where you are today, if you remain on track toward reaching your goals, or if any adjustments need to be made. Ultimately, there will be many ups and downs over the course of your life – the key is making adjustments when necessary to navigate market volatility over time.