Market Correction: Don’t Freak Out!

On Friday, the Dow Jones tanked by about 500 points and today it quickly dropped about 1,000 points after the opening of the bell. I track my personal finances with Personal Capital (an incredibly robust tool that is actually free to use).

One of the cool things about Personal Capital is that it will send you email alerts letting you know when specific things are happening. On Sunday, I received an email from personal capital with this subject: Your Portfolio is Down by -4.48%.

Portfolio Down

Now this could be a bit unnerving. My portfolio is down almost 4.48% (but I am doing a bit better than the S&P 500). After years of investing, I see this market correction as a temporary blimp. Markets tend to self-correct about every 18 months and we are overdue. The last adjustment was in 2011.

Why am I not Freaking Out?

It is human nature to freak out when things like this happen. I’ve seen people rush out and sell their stocks when the market tumbles, selling at their lowest point. This makes no sense, this is the time to buy — stocks are on sale!

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When the market tanked in 2007, I knew an older couple that cashed in their 401k and put that money into an old broken down cabin. They got penalized for early withdrawal, sold their securities at their absolute lowest and invested in a money pit that made things much worse. Had they simply waited it out, their 401k would be worth much more now than it was before the 2007 crash.

Here’s Why I’m Not Freaking Out

Our portfolio consists of stocks, bonds and cash, here is the breakdown thanks to Personal Capital:

Portfolio Allocation

First Level of Protection

As you can see, I have over 5% of my portfolio in cash. I can pull from that cash account for my monthly expenses without selling a single stock, so I am not forced to sell when stocks are low.

Second Level of Protection

You will also notice that bonds make up over 14% of my portfolio. Let’s say that the stock market decline sticks around for more than 6-10 months and I need cash for living expenses. When stock prices go down, bond prices go up. So I can easily cash in some of my bond funds when they are actually making money, selling high instead of selling low.

Conclusion

If you’ve invested in a balanced portfolio, there is no need to freak out, simply wait it out. If you are in a stock-only portfolio, try not to touch the stock. In fact, try to invest more now in low-cost index funds, they will increase once the market correction has passed.

Disclaimer: I am not a financial adviser, I am just sharing my experiences with you so invest at your own risk.

About this Blog

Steve and his wife built a software company, sold it and retired early. Steve enjoys blogging about about lifestyle freedom, financial independence and technology. If you like this blog, subscribe here to get an email each time he posts.

If you would like to download a free copy of Personal Capital, you can do that here.

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7 thoughts on “Market Correction: Don’t Freak Out!

  1. Robert & Robin Charlton

    We wholeheartedly agree Steve. If you’re a long-term investor planning for retirement, then stocks are now on sale so it’s a great time to buy. If you’re retired, then you should already have enough of a bond/cash position to weather out the storm. Either way, there’s no reason to panic when the markets inevitably turn south. We lost nearly $30K today alone, but we have no plans to take any money from stocks until the markets recover, so it’s only a “paper loss,” and we know stocks will eventually rise (miraculously) again. Meanwhile, we’re very glad for our bonds! But having weathered the Great Recession already, we know that buy and hold over the long term is the right approach.

    Reply
  2. LeisureFreak Tommy

    I have most of my stocks in Roths so they are my long plays anyway. I do have some stocks in my early retirement funding IRA so there was some impact but as you say, there is no need to panic if the diversification is in place.

    Reply
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