Sometimes life hands us second chances. And sometimes the stock market too offers up a second chance. They don’t come along as often as we’d like, but that is exactly what we’ve seen this year. After a quick and very steep drop-off starting in late-January, the U.S. stock market has recovered approximately half its earlier losses and is actually in positive territory this year.
This is an unusual opportunity and one that you may want to take advantage of. If you were feeling any amount of unease when the market headed south in January, I urge you to try the following three exercises. (If you weren’t feeling uneasy during the market’s recent dip, that’s a good sign. You can stop reading here, if you’d like.)
Learn to put the market’s movements into context. To avoid reacting to alarmist news headlines, I would urge you to know enough stock market history to answer these sorts of questions: What has been the historical average performance of stocks and of bonds? How frequently does the market have a down year? When the market does go down, how far down does it normally go and how long does it stay there? How many of the market’s best days have occurred during the market’s worst years, and vice versa?
Stress test your portfolio. Imagine if the market went down 20, 30 or even 50 percent. How would that impact the mix of investments that you hold? If you don’t like the answer, then this is a good opportunity to consider making a change, before something like that happens.
Be sure you completely understand all of your financial assets. Last week a client asked me to evaluate one of his investments, something a broker had once sold to him. It was a real Wall Street special; the name alone was 22 words, and it’s going to take some work to understand what exactly it is. To be sure, that was an extreme example. But, if you have a pension or own an annuity or a whole life insurance policy, it will be worthwhile to fight through the complexity to be sure you really understand it, and understand your options.