Coping with volatile stock markets means having stock exposure that is tailored to your individual risk tolerance. When set correctly, you will not lose sleep when there is a correction…like the one happening now.
Don’t do something, just stand there. – John Bogle
If you have to do something, re-assess your risk tolerance. – NoRobo Guy
As I write this, the stock market is down almost 5%, and that follows a loss of over 3% last Friday. I did a little rebalancing Monday…another down day, and that was to buy stocks, not sell them. Who knows how long the decline will be or by how much? It doesn’t really matter. What does matter is that, when your stock holdings are losing value, you understand that your exposure to them is also decreasing, which means your portfolio risk is decreasing. When it is time to rebalance, the correct choice is always to reset stock exposure back to the allocation you originally set. If you set stocks at 50%, and stocks fall to 45%, making bonds rise to 55%, then simply sell 5% bonds and buy 5% stocks to get it back to 50/50. That’s it. It’s not complicated.
If that process is not comforting, and you are not sleeping well, you probably have too much exposure to stocks. Maybe you just suffer from insomnia in general. I don’t know. But if it is not just insomnia, then you should reassess your need, willingness, and ability to take on risk. You have too much in stocks if you are not sleeping well from what is, at least so far, just a normal correction.
This blog post covers each of the steps for setting the level of stock market risk appropriate for you. Right now is an especially good time to take a risk survey because when markets misbehave (like now), you are much more likely to give realistic responses. People have a normal tendency to game these kinds of quizzes to get a preconceived outcome. They look for one that conforms to what they think should be a correct allocation for their age, or just want to conform with what their friends are doing. Just be honest. With the right allocations, it will be much easier to make and keep a commitment, and stick to your plan through thick and thin, because you will have the confidence it is the right allocation for you.
If instead you are sleeping well, then feel free to go back to doing nothing. Sorry to have bothered you!