7 keys to getting through a prolonged market downturn

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

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."²

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, you might consider a more conservative asset allocation,” says McGregor.

Typically, the greater the proportion of stocks in your portfolio, the “riskier” it is because you’re less diversified through other kinds of assets that may experience less volatile price swings. “One way for investors to help limit the effect from a market downturn is to invest in longer-term, high-quality bonds, such as Treasurys and very high-grade corporate and municipal bonds,” says Matthew Diczok, Head of Fixed Income Strategy 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 monthly 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.