How to Be Ready for Stock Market Losses

I like to throw you a depressing blog about the stock market occasionally to remind you that dropping stock markets are normal, not to panic and sell, blah, blah, blah.


Just when I was struggling to make this information fresh, I happened to listen to a podcast in the Choiceology series by Dr. Katy Milkman of the Wharton School.  This podcast was entitled The Power of Negative Thinking and it was just the idea I needed.


I know, we are all supposed to be thinking positively all the time to manifest in the universe the sunshine-and-roses life we want.  Really, I’m all about that, but this podcast highlighted examples and studies about why negative thinking can lead to being prepared for obstacles and a more positive outcome. 


The main example was a fascinating story of an oil rig sinking-salt mine collapse-massive sinkhole-vortex situation in Louisiana in 1980.  Speaking as a Louisiana native, this could only happen there, or maybe Florida.


Anyway, it was a disaster of epic proportions, but amazingly, no one was killed. This was due to the diligent preparation of the management and miners at the Jefferson Salt Mine.  The plan came from thinking negatively and preparing for the worst.


My point, and I do have one, is that when it comes to your investments, bad things will happen.  The difference between catastrophe and recovery is up to your plan.  The plan you make BEFORE the bad stuff happens.


So, what will you do if your accounts drop 5%?  Most will say, they would be able to hold on and wait for better days.  Good on you. That wasn’t even hard.


What about a 25% drop?  That’s your $1,000,000 now worth $750,000.  What now?  Might I offer this plan:


Step 1 (for retirees).  If you are drawing income from investments, make sure you have at least 6 months of uninvested cash on hand in case of severe market drops.  Some people are more comfortable with 12-18 months.  Work with your financial advisor on the right amount for you.

Step 1 (for asset builders). If you are 5+ years away from drawing on your investments, talk to your financial adviser about rebalancing your account to take advantage of buying on a dip.

Step 2.  Stay away from financial news shows.  They exist to scare you.  And sell advertising.

Step 3.  Call your financial advisor.  Discuss your plan.  Get reassurance that market drops are assumed as part of your plan.

Step 4.  Look at this chart for a reminder of how much more often the stock market rises than drops.  Then, go for a walk, meditate, or practice your ukulele.


This may not be as life-saving as a mine evacuation plan, but with practice, it could save your nest egg.  Not from bad markets (out of your control), but from your own bad decisions (within your control).



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