By Jonathan Harner, CFP®
With all the news of inflation and market volatility, it can be difficult to separate fact from sensationalism. Are we in a recession? Has the market crashed? Is my retirement plan still on track? These are questions clients ask on a daily basis. At Wichita Wealth Management, we strive to provide clients with the information they need to make well-informed decisions about their finances. In this article, we’ll discuss the difference between a correction and a crash and what you can do to safeguard your portfolio.
Correction vs. Crash
At the most basic level, a correction occurs when the market has declined slightly from its peak. Technically, a correction is a decline of 10% or less. A crash, on the other hand, occurs when the market drops by a significant amount in a very quick amount of time. It’s often described as a drop of 20% or more, but what constitutes a crash is often in the eye of the beholder.
These terms are often used interchangeably depending on what story is trying to be told about the markets. And whatever it is technically, it often doesn’t really matter when you receive your statement and you are down $10,000 or $100,000 or even $1 million. No matter how much it is, it feels like you lost a lot of money!
But did you really? As difficult as it can be to not react emotionally when you see large drops in your investment value, there is an alternative way to think about a market crash.
Stocks Are on Sale
Think of it this way: When the market crashes, stocks are on sale.
For example, would you rather buy a dozen eggs for $2, or two dozen eggs for $2? The total price you pay is the same, but the amount of eggs you buy is double. The same is true for stocks when the market declines. So, the value may have declined, but you own the same number of shares and can now purchase more shares at a discount.
Market crashes happen roughly every six years, (1) and they present us with some special opportunities:
- Rebalance and buy extra stock at a discount
- Discounted Roth conversions
- Potential tax-loss harvesting
Focus on What You Can Control
At Wichita Wealth Management, we focus on the things we can control, and that’s what we suggest for our clients as well.
If your investment plan cannot handle a market downturn, whether it’s a correction or a crash, that is a problem. We are not trying to prevent paper losses or “time the market.” Rather, we need a pool of easily accessible money to fund living expenses regardless of what the market is doing.
What can we control?
- Maintaining a “war chest” of cash and bonds: This can be thought of as the emergency fund, or easily accessible money that will carry you through the market downturn. By maintaining this, you can avoid selling assets at a low. Though it cannot always be avoided, the less you have to sell at a low, the better off your long-term portfolio will be.
- Strategic rebalancing: This keeps your portfolio from becoming too conservative or too aggressive over time.
- Careful diversification: This helps keep us from taking on too much risk. If your portfolio is not properly diversified, your investments could crash with the market.
- Tax efficiency: Which investments should be in your tax-deferred versus tax-free versus taxable accounts? How should you handle capital gains? Structuring your investments in a tax-efficient way can make a huge difference in the longevity of your portfolio.
- Discipline: This means staying invested regardless of what the headlines are screaming and continuing to invest while stocks are “on sale.”
We’re Here to Help
Regardless of the technical terms, market downturns present unique opportunities if you know where to look. Our Wichita Wealth Management team helps our clients understand their financial positions and make well-informed decisions about their futures. To learn more about how we can help you weather market volatility and plan for a confident retirement, schedule an introductory phone call by contacting me at 316-722-1010 or jonathan@wichitawealth.com.
About Jonathan
Jonathan Harner is a CERTIFIED FINANCIAL PLANNER™ practitioner at Wichita Wealth Management, a fee-only, fiduciary financial advisory firm dedicated to helping their clients thoroughly prepare for retirement. Jonathan’s goal is to simplify the complex so his clients can experience confidence and peace of mind as they work toward and live out their retirement dreams. He specializes in developing and implementing tax strategies that maximize his clients’ money and builds a tax-efficient withdrawal plan for retirement. Jonathan loves finding opportunities for his clients to save money and is dedicated to continual learning and growing in his profession so he can provide solutions for his clients’ financial needs. When he’s not working, you can find Jonathan spending time with his wife, Annie, and their daughter, staying active in his church community, and participating in his two favorite (but vastly different) hobbies: CrossFit and Dungeons & Dragons. To learn more about Jonathan and how he can help you, connect with him on LinkedIn.
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(1) https://www.capitalgroup.com/individual/planning/market-fluctuations/past-market-declines.html