Are You Prepared for a Market Correction?

By Chris Palabe, CFS®, AIF®

Financial markets are inherently volatile. Although the timing of a market correction is unpredictable, being ready for one is essential for safeguarding your investments and pursuing your retirement goals.

In this article, I share tips for preparing your finances for the inevitable market correction.

Assess Your Risk Tolerance

A person’s ability and willingness to tolerate changes in the value of their investments is referred to as their risk tolerance. It’s an important consideration while choosing the right investment plans. Determining your level of risk tolerance requires a thorough assessment of your age, income, and time horizon.

It’s critical to keep in mind that risk tolerance is not static. Over time, changes in financial goals and life circumstances may call for modifications to your investment strategy. Regularly reevaluating your risk tolerance verifies that your portfolio is in line with your evolving needs and priorities.

Diversify Your Portfolio

The goal of diversification as an investment strategy is to lower risk by spreading out investments among a range of businesses, asset classes, and geographical areas. It’s the opposite of placing all your eggs in one basket when it comes to money. You may be able to lessen the effect the performance of any one investment has on the performance of your entire portfolio by distributing your assets between several securities.

Making investments across several equities, bonds, and cash equivalents is an example of diversification. Further improving diversification can be done by making investments across different geographic locations or other stock market sectors. There are several perks to diversity, particularly in times of market correction, including lower portfolio volatility, better risk-adjusted returns, and more long-term growth potential.

Review and Rebalance Your Portfolio

Maintaining your financial health and reaching your long-term objectives requires routinely monitoring and rebalancing your investment portfolio. Through regular evaluations of your portfolio’s performance, asset mix, and risk profile, you can alter your investments in a way that aligns with your changing financial goals. In order to accomplish balance, you must compare the existing holdings in your portfolio to the intended asset allocation, identify any notable deviations, and take appropriate action to bring the portfolio back into line.

Rebalancing usually means selling some of the overweighted asset classes and putting the money raised back into the underweighted ones. This strategy lessens the effect of market corrections and helps avoid undue exposure to any one asset. Reviewing your portfolio also gives you a chance to reevaluate your time horizon, financial goals, and risk tolerance, verifying that your investment approach stays in line with your overall plan.

Maintain a Cash Reserve

An essential component of financial stability is keeping a cash reserve. This emergency fund serves as a safety net, giving you a buffer to pay for unforeseen costs like house repairs, medical bills, or job loss. We advise keeping three to six months’ worth of living expenses in your emergency fund. In addition to providing comfort, this liquid reserve eliminates the need to sell investments during a market correction.

The most important thing about an emergency fund is accessibility. The money should be freely available without any conditions or penalties. It’s crucial to stay away from investing your emergency money in securities with longer lock-up times. Prioritizing liquidity and keeping a sufficient cash reserve separate from investment accounts can help you safeguard your finances against market corrections and life’s unexpected obstacles.  

We’re Here for You

Remember that market corrections are a natural part of the investment cycle. By working with a professional investment advisor, you can create an investment plan to weather the ups and downs of the market.

Our team at Palabe Wealth focuses on helping you invest smarter so you can retire with confidence.

Reach out by scheduling a 20-minute introductory phone call or calling us at 847-249-6600 to learn if we are the right fit for your financial goals.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. (26-LPL)

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Bonds are subject to availability, change in price, call features and credit risk. (116-LPL)

Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss. (28-LPL)

Asset allocation does not ensure a profit or protect against a loss. (34-LPL)

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss.