There are some steps that investors can take to safeguard their portfolio beyond maintaining their contributions and avoiding the temptation to invest borrowed funds. Below, we highlight some simple yet effective remedies.
1. Rebalance Your Portfolio
Significant market movements often create the need to rebalance a portfolio. For example, a sharp increase in bond prices and a sharp decline in stock prices can result in bonds accounting for too much of a portfolio. Rebalancing would involve selling bonds and using the proceeds to buy stock in order to maintain a desired asset allocation.
According to Vanguard, nearly 90% of a portfolio’s volatility and returns can be traced back to asset allocation, making it one of the most important considerations for investors. Diversified investors with a similar asset allocation will experience similar risk and returns regardless of the specific investments that they choose within their portfolio.
2. Adjust Your Long-term Plans
You may find that you’re not as willing to risk money as you once were during a downturn, which means it may be time to rethink your asset allocations. For instance, you may decide that you want to move further into fixed income investments and reduce exposure to stocks if you find that market volatility is too extreme with your current allocations.
3. Harvest Tax Your Losses
Investors with taxable accounts can take advantage of market downturns by harvesting their tax losses. By selling investments for a loss and using the proceeds to repurchase similar investments, they can realize a loss during the current tax year that can be used to offset other capital gains.
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