INVESTING ESSENTIALS

After enjoying one of the longest bull market runs in U.S. stock market history (from March 2009 through early 2020), many investors overlooked 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.

Strategies to consider

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:

• Many eggs, many baskets. It may be a smart strategy to put your eggs in several baskets—that is, in several asset groups feeding into the performance of the portfolio. The colorful chart below helps illustrate this concept.
  

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. 

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.

• Diversified mutual funds. One way to achieve diversification is through asset allocation funds. These funds seek to reduce volatility by distributing assets into different buckets of investments. These buckets typically include a variety of equity securities, bonds and other fixed income securities. (See: Asset allocation funds can help tame volatility)

The diversification these funds offer may make them less volatile than the performance of a single equity category. While it is true that more conservative portfolios may tend to have lower potential returns over the long term, in the down times, their losses tend to be more modest than those of more aggressive investments.

• Noncorrelated assets. The chart suggests that when one asset declines, another may rise. Their performance isn’t correlated—they don’t rise (or fall) together. The idea behind investing in noncorrelated assets is to balance the ups and downs of those assets.

Noncorrelation doesn’t mean there’s a hard-and-fast relationship between assets. Two assets that perform in opposite ways one year can correlate the next year. And as we’ve mentioned, asset classes often rise (or fall) together in a single year. The idea is to diversify to spread the risk. (Thrivent Mutual Funds offers more than 20 stock, bond and asset allocation funds.)

• Periodic rebalancing. Whether the market has been up or down (or both), it’s worth rebalancing your portfolio from time to time. If most of your investments have been in stocks or stock funds during the past decade, you might find that you now have more money in equities than you expected—and more than you’re comfortable with—especially if you want to potentially mitigate your losses in a potential downturn.

A periodic review can also be helpful to see whether your asset allocation conforms to your current risk tolerance and your financial needs. Perhaps it’s time for more bonds and fewer stocks, for instance. That’s a decision to make based on what you consider your current tolerance for risk—how close you are to retirement, for instance. If retirement is a long way off, you may opt to stay fairly aggressive.

Think long-term

Perhaps the ultimate strategy is to stay calm and not 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 portfolio. It is extremely difficult to time the market. (Why market timing doesn’t work)

Instead, consider creating a mix of assets—stock funds and bond funds in particular or asset allocation funds—that can help to minimize losses during a downturn. That way, you may be in a good position to take advantage of the market across cycles of bull and bear market conditions.

In short, think long-term. Make a plan and stick to it. At the same time, make your plan flexible enough to adapt to changes in your needs.