What to Do When Your Investments Are Losing Money

When investments decline, it can be a source of concern for many individuals. Normal market fluctuations, and downturns are an inherent part of investment cycles. A thoughtful, informed approach, rather than emotional reactions, is often the most constructive path. Panic can lead to decisions that may hinder long-term financial objectives. Understanding market dynamics and maintaining a clear perspective on financial goals helps navigate these times.

Understanding Your Financial Context

Before making any investment decisions during a market downturn, it is important to assess your personal financial situation. This involves evaluating factors influencing how losses impact long-term goals. Understanding your circumstances provides a foundation for strategic adjustments.

Your investment time horizon

Your investment time horizon refers to the length of time you plan to hold an investment. A longer time horizon, over ten years, allows for greater risk-taking, as there is more time for recovery. Conversely, a shorter time horizon, three years or less, may necessitate a conservative approach to preserve capital.

Clearly defined financial goals

Clearly defined financial goals provide direction and purpose for your investment strategy. Whether saving for retirement, a home down payment, or education expenses, these objectives help determine the amount of money needed and the timeframe for achieving it. Reaffirming or adjusting these goals in light of market changes helps maintain focus and motivation.

Assessing your risk tolerance

Assessing your risk tolerance involves understanding your comfort level with potential investment losses. This includes your willingness and ability to withstand market fluctuations. An honest evaluation of emotional response to losses, beyond theoretical comfort, is important. Your risk profile helps align your investment choices with your comfort level and financial capacity.

Maintaining adequate liquidity

Maintaining adequate liquidity through an emergency fund is a foundation of sound financial planning. This cash reserve, typically covering three to six months of living expenses, helps avoid selling investments at a loss to cover unexpected costs. Separating emergency savings from long-term investments ensures that short-term needs do not disrupt your broader investment strategy.

Strategic Responses to Market Declines

Once your financial context is clear, several strategies can respond to market declines. These focus on managing your portfolio and leveraging market conditions. Each has specific mechanics and considerations.

Holding steady

Holding steady, or “buying and holding,” is a common approach for long-term investors. This involves resisting the urge to sell during a downturn and riding out volatility. For those with a long time horizon, market corrections are often temporary, and historical data suggests markets recover over time. This strategy relies on patience and a commitment to the initial investment thesis.

Dollar-cost averaging

Dollar-cost averaging involves investing a fixed amount of money at regular intervals, regardless of market fluctuations. During a market downturn, this strategy means purchasing more shares when prices are low and fewer shares when prices are high. This systematic approach can lead to a lower average cost per share over time, benefiting investors when the market eventually recovers.

Rebalancing your portfolio

Rebalancing your portfolio is the process of adjusting your asset allocation back to its target percentages. For example, if stocks have declined and bonds have increased, rebalancing might involve selling some bonds to buy more stocks to restore the desired stock-to-bond ratio. This strategy helps manage risk by ensuring the portfolio remains aligned with your long-term objectives and risk tolerance. Rebalancing can be done periodically, such as annually or quarterly, or when asset allocations drift beyond a predetermined threshold.

Tax-loss harvesting

Tax-loss harvesting is a strategy that involves selling investments at a loss to offset capital gains or a limited amount of ordinary income. Realized capital losses can offset capital gains, and if losses exceed gains, up to $3,000 can reduce ordinary income annually. Any losses beyond this amount can be carried forward indefinitely to offset future gains or income. The wash-sale rule disallows a loss if you sell a security and then buy the same or a “substantially identical” security within 30 days before or after the sale. This 61-day window must be observed to claim the loss.

Re-evaluating Your Investment Plan

Beyond immediate tactical responses, a market decline presents an opportunity to review your investment plan. This process helps ensure your long-term strategy remains appropriate for your goals and circumstances. It is a time for thoughtful consideration, not impulsive changes.

Reviewing your investment thesis

Reviewing your investment thesis involves revisiting why you invested in specific assets or sectors. Determine if the core rationale remains valid, or if the downturn signals a fundamental shift. This helps distinguish between temporary market noise and significant changes in an investment’s prospects.

Assessing your asset allocation

Assessing your asset allocation during a downturn confirms if your current mix of investments, such as stocks to bonds, aligns with your long-term goals and re-evaluated risk tolerance. Market movements can cause your portfolio’s original allocation to drift, increasing or decreasing its risk profile. Adjustments may be warranted to bring the portfolio back into alignment with your desired level of exposure.

A diversification check

A diversification check ensures your portfolio is spread across asset classes, industries, and geographic regions. Diversification aims to reduce risk by ensuring that poor performance of one investment may be offset by others. During a downturn, reviewing your diversification can highlight areas of overconcentration that might need addressing to mitigate future risks.

Identifying opportunities

Market downturns can present opportunities for long-term growth. When asset prices decline, quality investments may become available at lower valuations. This forward-looking perspective encourages investors to identify buying opportunities that could contribute to portfolio growth once the market recovers. Evaluating these opportunities requires careful research and adherence to your long-term investment strategy.

When to Seek Professional Guidance

Navigating market declines and re-evaluating investment strategies can be complex, and there are specific situations when consulting a financial professional becomes beneficial. Their expertise can provide objective insights and tailored advice. Deciding when to seek this guidance is a proactive step in managing financial well-being.

Indicators for seeking help

Indicators for seeking professional help include significant emotional distress due to market volatility or a complex financial situation. Individuals with large portfolios, those nearing retirement, or those facing major life transitions often benefit from expert advice. Uncertainty or a lack of time and expertise to manage investments also point to the value of professional guidance.

Types of financial professionals

Various types of financial professionals offer different services and compensation structures. Fee-only fiduciaries, for instance, are legally obligated to act in your best interest and are compensated directly by you, often through a flat fee, hourly rate, or a percentage of assets under management. Commission-based advisors, conversely, earn income from selling financial products, which can introduce potential conflicts of interest. Understanding these distinctions is important when choosing an advisor.

Benefits of professional advice

The benefits of professional advice are numerous, including gaining an objective perspective on your financial situation. An advisor can help develop tailored strategies that align with your specific goals and risk tolerance, providing a comprehensive approach to your finances. They can also assist with long-term planning, helping to integrate investment decisions with broader financial goals like retirement, tax planning, and estate considerations, offering peace of mind.