1. Don’t panic
In any type of emergency, including a financial one, the last thing you might want to do is panic. But keeping a clear head amid the market’s wild swings can be a big ask.
Despite a recent rally, the S&P 500 remains squarely in a bear market — meaning it has fallen at least 20% from its recent high.
However, equity investors might think twice before logging into their brokerage accounts to sell their hardest-hit stocks.
Consider the long-term trends. Since 1970, the annualized total return of the S&P 500 is over 11%, according to a report from Northwestern Mutual. If you invested $1,000 in 1970, that cash would have ballooned to $233,300 by the end of 2021.
Pulling out of the market might have negative consequences for years to come.
“Selling in a falling market may lock in losses that can take years to recover from,” the report says. “Investors who stick to their financial plan despite periods of volatility are often rewarded with more attractive long-term returns.”
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Diversify now2. Diversify your holdings
You might want to consider using this time to take a thoughtful look at your portfolio to make sure it’s balanced and not too heavily weighted in one asset class or another.
Rebalancing your investments can help manage risks and avoid making expensive mistakes, analysts say.
“To build a diversified portfolio, you should look for investments — stocks, bonds, cash or others — whose returns haven't historically moved in the same direction and to the same degree,” according to a Fidelity guide to diversification.
That way, if one portion of your portfolio is falling, the rest is likely to be growing.
Fidelity also claims that it’s important to diversify within each investment type and across market capitalizations, sectors and geographies.
“During the 2008–2009 bear market, many different types of investments lost value at the same time, but diversification still helped contain overall portfolio losses,” the guide says.
3. Keep some cash
Many people in their working years keep much of their portfolio in illiquid, long-term assets while maintaining a modest store of cash in the event of a financial emergency.
A general rule of thumb is to have three to six months' worth of expenses on hand in case of a job loss or another financial crisis.
But if you’re at or near retirement age and relying on an investment portfolio as your main source of income, you may be seeking more liquidity should the market hit a downturn when you stop working.
This phenomenon is known as the “sequence of returns risk.”
Say you’re planning to sell stocks to generate cash to live on. If the market falls in your early years of retirement, you may have to sell more shares, in which case you’d be left with fewer assets to generate growth in the future.
To keep those stocks intact, analysts recommend having cash investments or other liquid assets to draw from during those early years.
“If your stock portfolio is down, but your bonds have gained or held steady, you may be able to trim your bond holdings to generate cash instead,” according to a report from Fidelity.
Of course, the biggest problem with cash is obvious: It doesn’t pay much. At time of writing, the national interest rate for savings accounts is 0.21%.
That said, stable assets such as farmland can offer higher interest rates with “cash-like” reliability. For example, FarmTogether — a farmland investment manager that allows qualified investors to purchase stakes in U.S. farms — targets opportunities with potential cash yields of 2% to 9% and total returns (which include appreciation) of 6% to 13%.
Farmland is one of the top asset classes capable of insulating your money from volatile market conditions. Learn how you can use FarmTogether to safeguard your portfolio.
Diversify now4. Buying the dip
While you may feel like burying your head in the sand until the market recovers, you might want to consider buying stocks that may now be selling at a discount.
Though it’s impossible to know when the stock market will bottom out, bear markets and recessions often overlap, according to Los Angeles-based investment manager Capital Group.
And equities often lead the way in an economic cycle by six to seven months on the way down and also on the way up.
A dollar-cost averaging strategy, where an investor puts equal amounts of cash into the market on a regular basis over time, could be a smart play when the market is down.
“This approach can allow investors to purchase more shares at lower prices while remaining positioned for when the market eventually rebounds,” Capital Group says.
5. Look beyond the stock market
The traditional approach has been to allocate 60% of an investor's portfolio to stocks and 40% to safer, more stable bonds. But some experts say the 60/40 model is dated given today’s investing landscape, which offers more options than ever before.
With continued volatility in major stock indices, you may want to consider alternative investments.
There are a raft of investment choices other than stocks, bonds and cash that could help stabilize your portfolio and spread your investment risk.
Gold, real estate, art or farmland, for example, are assets that generally do not tend to have the same ups and downs as stocks.
In fact, from 1992-2021, farmland had a -0.06 correlation to the S&P 500, according to research from FarmTogether using data from the NCREIF Farmland Index. Plus, farmland has historically fared better when inflation is rising, as grain and agricultural product producers tend to benefit from the increased prices.
“As we navigate a particularly turbulent macro environment in 2022, we have seen U.S. farmland perform well during this period,” says David Chan, chief client services and head of business development for FarmTogether. “Farmland has even outperformed other real assets during this period.”
Farmland posted a positive appreciation rate of 1.17% for the third quarter of 2022, while institutional real estate showed negative growth, Chan says, citing new data from the National Council for Real Estate Investment Fiduciaries.
6. Look for recession-resistant opportunities
Even during a downturn, everyone still needs to buy groceries, heat and cool their homes, visit their doctors and fill their prescriptions.
A 2021 report from the National Bureau of Economic Research found that the health care sector saw employment increases during economic downturns.
Companies that can’t help but make money during an economic downturn can help stabilize an investment portfolio.
Farmland, too, is an investment that has been shown to be comparatively resilient in the face of economic headwinds.
U.S. farmland has generated an average annual return of 10.7% from 1991 through 2021, according to a report from Manulife Investment Management.
“We are living through a period that demonstrates just how resilient farmland can be, and this underscores why we believe it is a wonderful addition to many investors' portfolios,” Chan says.
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