One of the many things Warren Buffet is known for is something called the Noah rule: “Predicting rain doesn’t count. Building arks does.”
After enjoying one of the longest bull market runs in U.S. stock market history (from March 2009 through early 2020), many investors found it easy to overlook the fact that markets can also go down, and even those who realized this may have failed to convert that thought into action. As a result, when new economic challenges emerged, some of the gains earned during the bull market quickly vanished when the inevitable down market came.
That’s why it’s a good idea to consider investment strategies designed to help mitigate your losses in a down market. Below, we’ve laid out a handful of strategies that you may find helpful.
First of all, let’s be clear: Even if you follow one of these strategies (or several of them) rigorously, there’s no guarantee that your assets won’t decline in value as the overall market declines. But these strategies could help mitigate your losses and potentially continue your income stream amidst the choppy waters:
(More information on the components in this chart is available in the footnotes.1)
The chart compares 10 years of annual performance for 11 different asset groups. It shows how different types of assets perform differently relative to the other asset groups from year to year. For instance, the chart shows that the performance of Mid-Cap Stocks (in the dark gray box) exceeded the performance of many other asset classes during four of the past 10 years, but it has also been among the worst performers within the same time period.
That’s why diversification is so important. Since each asset class tends to vary in performance from one year to the next, an asset class that leads all categories one year could trail the next year. Although diversification can help reduce market risk, it does not eliminate it and it does not assure a profit or protect against loss in a declining market. Also, of note, these asset classes often increase and decrease in value during a single year, although at different percentages. Still, diversification may help reduce losses during stock market fluctuations.
Perhaps the ultimate strategy is to stay calm and try not to overreact. History teaches that the bear market will return—at some point. But constantly tinkering with your portfolio based on a few days of market drops may be counterproductive and could ultimately hurt your performance. It can be a sucker’s bet to try to time the market. (See: The folly of market timing)
Instead, consider creating a mix of assets—stock funds and bond funds in particular or asset allocation funds—that may minimize your losses during a downturn. That way, you may be in a good position to take advantage of the market when it returns to bull territory.
In short, think long-term. Make a plan and stick to it. At the same time, make your plan flexible enough to adjust to changes in your family’s needs.
Past performance is not necessarily indicative of future results.
The concepts presented are intended for educational purposes only. This information should not be considered investment advice or a recommendation of any particular security, strategy, or product.
Any indexes shown are unmanaged and do not reflect the typical costs of investing. Investors cannot invest directly in an index.
In the chart:
Cash is represented by the Bloomberg Barclays US Treasury Bill 1-3 Month Index, which measures the performance of public obligations of the U.S. Treasury with maturities of 1-3 months.
High-Yield Bonds are represented by the Bloomberg Barclays US Corporate High-Yield Bond Index, which measures the performance of fixed-rate noninvestment-grade bonds.
International Bonds are represented by the Bloomberg Barclays Global Aggregate Index ex-USA, which measures the performance of global investment grade fixed-rate debt markets that excludes USD-denominated securities.
International Stocks are represented by the MSCI All Country World Index ex-USA, which is a free float-adjusted market capitalization index that is designed to measure equity market performance in all global developed and emerging markets outside the U.S.
Large Cap Growth Stocks are represented by the S&P 500 Growth Index®, which measures the performance of large-cap growth stocks.
Large Cap Stocks are represented by the S&P 500 Index®, which represents the average performance of a group of 500 large-cap stocks.
Large Cap Value Stocks are represented by the S&P 500 Value Index®, which measures the performance of large-cap value stocks.
Mid-Cap Stocks are represented by the S&P MidCap 400 Index®, which measures the performance of mid-cap stocks.
Real Estate Securities is represented by the Real Estate sector of the S&P 500 Index®. Small Cap Stocks are represented by the S&P SmallCap 600 Index®, which measures the performance of small-cap stocks.
Investment-Grade Bonds are represented by the Bloomberg Barclays US Aggregate Bond Index, which measures the performance of U.S. investment grade bonds.