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Before the Crash

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Surviving the Next Market Crash, Part 2

By Simon Lim, CFA, CAIA | 20 October 2018

Stock market volatility returned with a vengeance in 2018. This two-part series looks at creating a long-term game plan that will help you stay disciplined during volatile periods.

Create a game plan

A better plan is to develop a clear investment plan to let reason rather than emotion rule your investment decisions. This is critical during periods of market turmoil and frenzy. 

Step 1: Know your investment objectives and risk tolerance

Talk with your adviser and determine your objectives (e.g., retirement, education, travel, etc.). Combined with an understanding of your cash flow needs and risk tolerance, these goals will help determine the right investment mix for you.
Investing in the stock market is risky, and success depends on your ability to ride out lows and stay invested for recoveries. Know how much volatility you’re willing to accept in exchange for higher returns.

Step 2: Trust in diversification 

Asset classes (e.g., stocks, bonds, real estate etc.) perform differently in various economic environments. Having a mix of assets lowers your overall portfolio risk because certain investments will perform well when others are not. 

For example, during the 17-month bear market from 2007-2009, was a very difficult period when the U.S. stock market fell almost 50%. However, investments such as gold and US Treasury bonds performed well. During the next bear market, a diversified portfolio will help you “stay the course” when other investors panic. 

Step 3: Know why you own “it”

Know the strengths, weaknesses and purpose of every investment in your portfolio. This will prevent you from dumping a perfectly good long-term investment just because it had a bad day, week, or month. You will know the right reasons to sell and have an objective way to determine when it’s the right time to part ways with a losing (or even a winning) investment.

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