Written by Tyson Ray, FORM Wealth Advisors | CFP®, CExP®, CIMA®
The first time I took a cruise, I was really excited to get on that huge boat. I couldn’t wait to see everything the cruise had to offer. However, I was a little surprised when the first thing they had all of us do was participate in a lifeboat drill. They wanted us to be prepared — just in case the ship were to sink!
Lifeboat drills are kind of like the markets — typically everything is fine, but once in a while, things start to go south. Now, if you feel a little turbulence on the ship, are you going to run toward the balcony and throw yourself over the railing, into the sea? No.
Turbulence at sea is a lot like turbulence in the markets — most likely, it’s temporary, so your best plan is to stay calm, stay put and stay the course.
The markets have been doing well for a long time, and we have kind of been lulled into believing it will always be this way. But history tells us that the markets will decline at some point, even though that decline will be temporary.
Market sell-offs are normal and expected
I want to provide some perspective for you regarding what you need to know about market ups and downs. At some point, the markets do sell off. Below is one of my favorite charts. It shows how the market sold off that in every calendar year. At some point, the market had some type of correction from top to bottom in that 12-month period of time. This chart shows the percentage of each decline.
For example, you can see the dot in the bottom right corner; it shows that during the Covid pandemic, the market sold off 34 percent in 30 days, More recently, in 2024, the sell-off from top to bottom has been only about 5 percent so far. There have been plenty of other years when we’ve had similar pullbacks. What I want to caution you about is that at any time, we could have a major pullback. If that happens, what are you going to do about it? Stay the course!
Now, let’s look at this chart from a different vantage point. This second chart shows the calendar years when the market finished down.
If you look back over time, you’ll realize it’s actually quite rare on December 31st for the market to finish lower at the end of a 12-month period than it did at the first of the year. This chart shows why we shouldn’t jump ship if the market does sell off. We simply need to realize that corrections are normal.
In general, it’s best not to make knee-jerk decisions as soon as we see a fluctuation in the markets.
This third graph is my favorite perspective of the markets. It shows the calendar years in which the markets have finished higher at the end of the year. And, as usual, when the year ends with the markets up, they could stay there for a while, or there could be a sell-off.
Now, you do not want to have any money that you need in the short term exposed to such fluctuation — with the markets bouncing around — but it’s important to realize that having some of your investments exposed to that fluctuation can pay off well in the long term. The reward comes when you stay the course and stay put.
The opportunities in market downturns
There are ways you can strengthen your financial position during a market downturn. We are here to help you take advantage of those opportunities. As Warren Buffett says, “A market downturn doesn’t bother us. It is an opportunity to increase our ownership of great companies with great management at good prices.”
Here are just four of many ways we can guide you in making the most of a market sell-off.
1. Buy the dip
You’ve probably heard about investors who “buy the dip.” This means they increase their exposure to an asset when prices are depressed in anticipation of prices recovering and earning larger returns. Wise investors base their decision on when to buy the dip on careful research and analysis — and guidance from their financial advisors. The downside risk for buying the dip is quite high because you are increasing your overall position on that particular asset.
2. Invest in consumer staples
Another strategy for weathering a downturn or recession is to invest in consumer staples; sectors composed of those goods and services tend to be more stable during downturns than others. Defensive stocks are those that demonstrate relatively stable performance, regardless of the current state of the economy. They are also called non-cyclical stocks because they are less prone to the economic cycle of expansions and recessions. Examples include utility stocks, consumer staples and health care. These stocks tend to be insulated from the market ups and downs because they relate to goods and services people must have, regardless of what’s happening with the economy. During a recession, these stocks can help protect your portfolio.
3. Check your portfolio’s diversification
You are most likely aware of the importance of diversifying your portfolio so your asset mix isn’t heavy in the riskiest, most volatile assets. This is even more important during a market downturn. I strongly advise you to meet with your financial advisor to make sure your portfolio is diversified appropriately with stocks and bonds.
Stocks that tend to suffer the most losses during economic downturns are companies that sell discretionary products and services — things that consumers can live without. So, to reiterate strategy #2 listed above, make sure you are not heavily invested in those types of stocks during a downturn.
4. Use dollar-cost averaging
Another strategy we sometimes recommend during a market downturn is dollar-cost averaging, which means buying a fixed amount of an investment on a regular basis, regardless of the current price. This strategy can make it easier to deal with uncertain markets by making purchases automatic. It also supports your effort to invest regularly. Recessions are great opportunities to use dollar-cost averaging because you can buy shares as the prices decline. You can dollar-cost average with new money or simply set your dividends to automatically reinvest in the security, which will serve the same purpose.
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We are here to help make life better for our clients and those in our community. I encourage you to take advantage of our team’s experience and expertise to optimize your financial position, whether we are in a period of turbulence or “smooth sailing.” Consider our team to be the lifeboat that will not only save you from any potential catastrophic losses but help you thrive during the rough times.
Any opinions are those of the author and not necessarily those of Raymond James. This material is being provided for informational purposes only and is not a complete description, nor is it a recommendation. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.
