How to Handle a Stock Market Downturn in 2022

When this article was initially published, we were in the early days of the Coronavirus Pandemic. At that time, we saw many folks are loading up on essentials and hunkering down to stay safe. Back in 2020, when we published this article, the markets were down roughly 25% across the world and we had officially crossed into a bear market. Now again in May 2022, we are seeing another stock market downturn and potential recession on the horizon.

How to Handle Stock Market Downturns

As we find ourselves in another stock market downturn in 2022, it is important as a financial planner to help break apart the narrative and provide financial perspective. I can’t help but remember how things felt just back in March of 2020, during the correction at the end of 2008, and I notice an eerily similar feeling to 2001. While the markets are extremely important to pay attention to for your retirement planning, long term strategies should be in place to keep you on track for the long haul. The key to managing through these types of scenarios is to be prepared ahead of the drop, act before the markets react, and take advantage of the lower prices.

So how do we do this?

Have Detailed Conversations About Your Finances and Feelings

The first tip to handle a stock market downturn is to have truly detailed conversations about different scenarios you may face in the markets to be sure your allocation fits your comfort level. Many times we find individual investors are in a portfolio too aggressive, which may lead to increased nerves through this drop. Whether you manage your own investments or work with an advisor, a true deep dive into your feelings about market fluctuations is invaluable to help you sleep at night during these times. Typically, a third party is needed to provide a truly objective assessment. This is so critical because a reaction during a market drop may lead to selling at or near a bottom, and a very difficult road to recovery.

Take the Emotions Out of Your Investments

Second, try to take emotions out of your investment strategy. Nobody wants to play defense when the markets are going up and up and up, but this is exactly what should be done. As the markets are rising you should consider ways to manage risk and “take chips off the table.” We had some tough conversations with our clients in the weeks leading up to the downturn back in 2020, and again here in 2022. It’s important to discuss why we were managing risk with our clients.

The key is to do this when most people are getting wrapped up in the market euphoria or sugar high at the top, to handle the crash when it comes. Instead, what we find is that most individual investors are now getting nervous or selling as the market drops, and this may be the worst thing to do as this will locks in a loss. Assume you were to buy an asset today for a dollar, the next day there is an oversupply for some reason and now that asset is only worth 50 cents. But, since you are in for the long term, you hold on to the asset and sell five years from now for 3 dollars – how much did you lose when it was worth 50 cents? You didn’t lose anything right? You actually experienced a gain of 2 dollars by sticking with it and maintaining your long-term plan.

Use the Stock Market Downturn as a Buying Opportunity

So, what can we do now, in the midst of this downturn? Assuming your portfolio was allocated properly and that you had set up some risk management strategies prior to the correction, this may be a good time to take advantage of the prices. Start looking for additional funds, find the cash in the cushions, and put it to work! It may be impossible to time the bottom, and it is critical to be sure not to “catch a falling knife”, but by dollar cost averaging in during downturns you can help to manage emotions and set up a high likelihood of buying at a low price.

The key to buying in at this point is to be selective in your purchases. One of the challenges in a world driven by individual investors buying the S&P 500 is that this one asset can be extremely lop-sided, and may actually lead to far too much exposure in one area of the market. This may also be a great time to consider rebalancing to re-align your portfolio and sell the assets that have done well to buy the assets that are on sale – just put some thought into when and how you do this.

Most of All, Have a Plan in Place for the Future

As I am reflecting on recent conversations, it is clear the key to managing through downturns is to be proactive and manage emotions. It is critical to have a plan in place to handle these scenarios before they come up. When the markets are going up, everyone is happy and making money, but as soon as things turn, the difference between a thoughtful investment strategy with someone to help you stick to your plan and a “hands off” strategy becomes clear very quickly.

Successful retirement planning is validated leading up to and during these periods of uncertainty. Be sure to have the right conversations and strategies in place to manage your investments objectively and without emotional biases. The more effective you are in handling all market conditions the smoother the ride. It’s important o keep in mind retirement is a long term game and during times of uncertainty, always fall back on your long term plan.