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7 Keys to Getting Through a Prolonged Market Downturn

Here's what you may want to do—and avoid doing—as you maneuver through an extended decline

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It's quite natural to grow uneasy when a market downturn begins to look like it’s here to stay. "Is this what a bear market looks like?" you may ask yourself. "And what should I consider doing now?"

"The standard definition of a bear market is when major U.S. stock indices, such as the S&P 500, drop by 20% or more from their peak," says Nick Giorgi, an investment strategist in the Chief Investment Office (CIO) for Merrill and Bank of America Private Bank. "By that criterion, there have been 11 bear markets in the S&P 500 since 1926 and they’ve tended to last an average of a year-and-a-half, compared with the multi-year span of a typical bull market.

"Sustained declines are bound to make investors uncomfortable while they’re happening," Giorgi notes. "But there are steps you can take to put times like this in perspective — and potentially even benefit.” Below, Giorgi and other experts in our CIO offer seven tips that can help you weather a prolonged market downturn.

“Sustained declines are bound to make investors uncomfortable while they’re happening. But there are steps you can take to put times like this in perspective — and perhaps even potentially benefit.”

Nick Giorgi, investment strategist, Chief Investment Office for Merrill and Bank of America Private Bank

Avoid knee-jerk reactions. When the market drops, it can be tempting to jump out until asset values begin climbing up again. But that can lead to costly mistakes. By selling when the market has fallen steeply, you’re at risk of locking in a permanent loss of capital. “To optimize one’s potential over the long term, what’s crucial is time in the market, not market timing,” says Niladri Mukherjee, head of CIO Portfolio Strategy in the Chief Investment Office for Merrill and Bank of America Private Bank. “If you sit on the sidelines when markets become volatile, you could miss major rallies, which often occur during the early stages of a recovery, over a limited number of days.1

Revisit your goals and risk tolerance. During a bull market, it’s easy to forget how uncomfortable it can be when your assets decline in value—especially assets that you’re counting on to fulfill a relatively short-term goal. If you’re retiring in a few years, it could be wise to think about dialing back risk, even if it feels as if you’re doing it after the fact. “Investors with longer time horizons could typically withstand market volatility. But if you need to tap investments sooner, your asset allocation should be more conservative,” says Marci McGregor, senior investment strategist with the Chief Investment Office for Merrill and Bank of America Private Bank.

Typically, the greater the proportion of stocks in your portfolio, the “riskier” it is because you’re less diversified through other kinds of assets. “One way for investors to help limit the effect from a market downturn is to invest in longer-term, high-quality bonds, such as 10-year Treasurys,” says Matthew Diczok, a fixed income strategist in the Chief Investment Office for Merrill and Bank of America Private Bank. By diversifying your portfolio more broadly — with a mix of bonds and cash in addition to stocks — you may not experience the same degree of loss, says McGregor. At the same time, she adds, you might not see as great a gain when the market heads back upward.

Keep investing consistently. By investing a fixed amount of money at regular intervals regardless of market conditions, you’re more likely to be able to purchase equities at more affordable prices, and potentially see the shares rise in value once the market rebounds. Making regular weekly or bi-weekly contributions to your portfolio—a strategy called dollar-cost averaging—is a form of systematic investing that potentially can offer efficiency when the market has fallen.

Find strategic opportunities. In a market downturn, defensive stocks—consumer staples, healthcare and utilities, as well as companies with higher-quality businesses and balance sheets—potentially can offer opportunities. You might also find opportunities in higher-quality stocks that pay dividends, especially ones that have historically grown their dividends consistently; they may potentially help to boost your total return when stock prices may be falling. 

High-quality stocks that pay dividends may potentially help to boost your total return when stock prices are falling.

You may also want to consider a fiduciary account—which means it's overseen by an outside party for the owner's benefit—that is professionally managed. Some mutual funds, for instance, have investment teams that actively manage fund portfolios, responding to market conditions and rebalancing as needed.  (This is in contrast to passive investing, in which a group of stocks is tied to a particular index that, as a whole, has outperformed the market.) When markets are challenging, professionally managed funds could potentially outperform passively managed funds. “Active managers are often more conservative and do the research to find the companies that represent real value, whereas in index funds poor-quality companies can be lumped in with the good,” says Giorgi.

Rebalance your portfolio. Over the course of a long bull market, your equities can appreciate or depreciate more quickly than your bond or cash holdings, throwing your portfolio out of alignment with your preferred asset allocation.Consider this an opportunity to address any imbalances that may have occurred. If equities make up too large a portion of your investments, for instance, now may be the time to consider selling some stocks and moving that money into cash equivalents or bonds, depending on market conditions and your particular situation.

Maintain perspective. No matter how deep or long the downturn ends up being, in the past markets have bounced back. “Bear markets have been seen before, and anyone looking at the historical price charts can see that those markets have recovered to grow higher than before,” 1 says Giorgi. “Investors who remain even-keeled and disciplined in a negative market are likely to avoid common pitfalls and potentially enjoy better times ahead. Historically, the longer you stay invested, the greater your possibility of meeting your long-term goals.”

If you haven’t already done so, check in with a financial advisor. If you feel as though your emotions are getting the better of you, consider reaching out for professional advice. An advisor can help you review your financial approach and offer investment insights that may help limit the effect that a market downturn could have on your short- and long-term goals. And as the markets recover, your advisor can continue to help you stay on track, working with you to adjust as your priorities change over time. 

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