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Prudent Actions When Your Portfolio Is Down

by Kevin Kroskey, CFP®, MBA

From the Experts 

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Investing in the stock market can be a rollercoaster ride, with its ups and downs. When the market takes a downturn, it’s natural to feel anxious about your investments. However, making hasty decisions can often do more harm than good. Here are some prudent actions you can take to manage your portfolio effectively during such times. 

Avoid Panic Selling 

One of the biggest mistakes investors make during a market downturn is panic selling. It’s understandable to feel the urge to sell off your investments when you see their value dropping, but this can lock in your losses and prevent you from benefiting from a potential market recovery. 

Instead of reacting impulsively, be disciplined. Review your investment goals and strategy, preferably in the context of your financial plan. Doing so helps make the connection between your portfolio and your financial life more concrete. In the absence of concreteness, it’s easy for fear to fill the void. 

Investing Process Revisited 

When the market is down, it’s a good time to revisit your investing process, as inputs that flow into your process have likely changed. These inputs may relate to risk, return expectations, diversification, scenario analyses, and more. 

Let’s focus on diversification, which is a fundamental principle of investing and a prudent investing process. It involves spreading your investments across various asset classes – such as stocks, bonds, real estate, and commodities – or various strategies – such as long-only, long-short, or trend following. Each should have a unique source of risk and return that, when combined, reduce the risk of your overall portfolio strategy. 

Oftentimes investors and even advisors misconstrue simply having many holdings with diversification. If you own 10 different technology-focused investments, you’re still exposed to the same or similar underlying source of return, which is not diversification. Many learned this lesson the hard way in the early 2000s and in 2022. Yet, many are likely to learn it again. Well, perhaps “learn” may be too strong and should be replaced with some conjugation of “experience.” 

Though more advanced, you or your advisor can pursue unique sources of returns within an asset class accessed via a different strategy. For example, a long-short stock strategy may go long high-quality stocks such as those with high profitability, low debt levels, and stability in their earnings. The strategy pairs the high-quality longs with low-quality shorts. Shorts would have opposing traits – low profitability, high debt levels, and high earnings volatility. While this Quality minus Junk (QMJ) strategy uses stocks it largely negates the inherent risk in the stock market and instead focuses on the unique QMJ source of risk and return within stocks. Historically, QMJ strategies have proved to increase diversification, add to returns, and be resilient in market downturns. 

Tax Loss Harvesting 

Tax loss harvesting is a strategy that involves selling investments that have declined in value to offset gains from other investments. This can help reduce your overall tax liability. For example, if you have a stock or fund that has lost value, you can sell it to realize the loss and use it to offset gains from other investments. 

During a market downturn, it’s also a good time to reassess your portfolio and consider selling investments that are no longer your preferred holdings. Sometimes, investors hold onto certain investments to avoid capital gains taxes. However, if these investments no longer best align with your investment strategy, it might be worth selling them now that the gain has declined, which may also be further offset by tax loss harvesting on other holdings. 

Seek Professional Advice 

Review your financial plan, investment process, and tax strategy regularly. They should be well aligned to help you make the most of what you have. Make adjustments as needed. 

If you’re unsure about what actions to take or want a second opinion on actions your advisor is or is not taking, consider seeking advice from a trustworthy and competent financial advisor. To start checking these important boxes, seek an advisor who has attained gold-standard professional certifications such as the CFP® or CFA® and cannot accept commissions from investment products. This will quickly narrow your search.

Also ensure the advisor also has robust financial planning and tax capabilities. These are more difficult to discern, as virtually all advisors say they perform these services even if they don’t or only scratch the surface. If the advisory firm has CPAs on staff and prepares tax returns in-house, it’s a good indication they possess requisite tax capabilities. 

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Kevin Kroskey, CFP^®, MBA is the Founder of True Wealth Design, providing “Accounting, Tax & Wealth Solutions To Help You Plan Smarter and Live Better.” This article is for educational purposes only. The strategies referenced apply to Accredited Investors or Qualified Purchases per SEC regulations. To explore how these strategies may apply to you, call or email kkroskey@truewealthdesign.com.

Opinions and claims expressed above are those of the author and do not necessarily reflect those of ScripType Publishing.