These have been, and undoubtedly will continue to be, unsettling financial times.

The comforting fact is that boom-and-bust market cycles have been with us since records have been kept. On a regular basis, the capital-market system drives itself into periods of excess, followed by periods of correction to re-achieve equilibrium.

What should we do to protect our financial wellbeing during these downward correction periods and during boom times, as well?

First, we need to understand what history has taught us - that up-and-down capital-market cycles are normal, that the long-term historical return on equities (stocks) is positive, and that historical stock returns exceed inflation.

Second, we need to acknowledge what we can and cannot control. We cannot control the markets. We can control how we design and manage our personal financial strategies in a way that protects us from unnecessary risk and from ourselves in the form of emotions.

Easier said than done! Here are some suggestions:

Stick with your plan

If you have a sound investment plan – one that has an appropriate stock/fixed-income-cash allocation, is broadly-diversified, and reflects your investment time horizon, risk tolerance, and goals – the standard advice is to hold steady. Do not let concern lead to fear, which can then lead to panic. Selling equities to avoid further “paper” loss may be tempting, but it is allowing emotion to drive the investment strategy.

It is easy to establish a vicious cycle. For example, when is the best time to reinvest in equities following a decision to flee to cash? History shows that recoveries occur in short bursts. The March-to-December 2009 market rally is the most-recent demonstration. Folks who engage in such in-and-out timing tend to feel comfortable re-entering the market only once a substantial recovery has been realized and sustained, thereby missing a major portion of the recovery.
It is equally tempting to invest more heavily in stocks when markets are up. Not a good idea either!

Continue regular contributions

If you are in the final pre-retirement accumulation phase of your financial life, continue to contribute regularly to your 401(k), IRA/Roth IRA, and other investment plans. Don’t let down markets scare you. Low stock and stock fund prices mean that you are buying more shares for each contribution dollar. This method of saving a fixed amount of money on a regular basis is called “dollar cost averaging”. With it, your actual long-term cost per share becomes lower than your average cost per share. Yes, that sounds like double talk. But if you go through the math carefully, that is how the numbers work out.

Periodically Rebalance your Total Portfolio

Over time, various asset classes in your portfolio stray from their intended target percentages. Regular rebalancing, say, annually, will shift money from asset classes that have over-performed (on a relative basis) to those that have underperformed. This is a good example of “buying low” and “selling high” and ensures that your portfolio allocation stays true to its intended design, maintaining a constant level of risk.

Review Other Key Aspects of your Financial Picture

Achieving and maintaining a healthy financial picture involves much more than the savings and investment pieces. Other key elements include cash flow management, income tax and charitable-giving strategies, helping grandchildren pay for college, choosing a health insurance plan that gives you needed benefits at the least cost, deciding how best to prepare for possible long-term care needs, and making sure your wills and related estate planning documents are in order.

And, if you are not yet receiving Social Security benefits, making the right decision about when to start can have a huge financial impact on your household. This is particularly true for couples where the interplay of individual vs. spousal vs. survivor benefits and the potential sequencing of these benefits should be part of a deliberate strategy.

Work with a Trusted Financial Advisor

Going it alone is always dangerous, particularly these days when it is easy to let emotions overcome reason, potentially subjecting you to irreversible, life-long financial damage. Seek out a knowledgeable professional who has your best interests at heart, not someone whose incentive is to sell you a product.

James Terwilliger, CFP®, is Vice President, Financial Planning, Wealth Strategies Group, Canandaigua National Bank & Trust Company. He can be reached at 585-419-0670 ext. 50630 or by email at [email protected].