3 mistakes to avoid during a market downturn

1

Failing to have a plan

Investing without a plan is an error that invites other errors, such as chasing performance, market-timing, or reacting to market “noise.” Such temptations multiply during downturns, as investors looking to protect their portfolios seek quick fixes.

Developing an investment plan doesn’t need to be hard. You can start by answering a few key questions. If you’re not inclined to make your own plan, a financial advisor can help.

2

Fixating on “losses”

Let’s say you have a plan, and your portfolio is balanced across asset classes and diversified within them, but your portfolio’s value drops significantly in a market swoon. Don’t despair. Stock downturns are normal, and most investors will endure many of them.

Between 1980 and 2019, for example, there were 8 bear markets in stocks (declines of 20% or more, lasting at least 2 months) and 13 corrections (declines of at least

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Making the best of a market downturn

Be prepared 

To begin with, every investor should:

  1. Create or revisit investment goals, making sure they’re appropriate;
  2. Develop a suitable asset allocation using broadly diversified funds;
  3. Control cost; and
  4. Maintain perspective and long-term discipline.

The first 3 steps are integral to developing a good investment plan. The fourth step is required to enjoy the potential long-term benefits of that plan. Vanguard’s Principles for Investing Success provide a detailed primer on all 4 steps. For our research on these and other issues, see Vanguard’s framework for constructing globally diversified portfolios.

Rebalance 

We also believe you should periodically adjust your holdings to keep them in line with your target asset mix.

Getting back to your target mix, or rebalancing, sounds simple but often turns out to be psychologically difficult. That’s because it requires selling assets that have performed better for you and buying those that haven’t done as well.

In market

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