Stay the course. Stick with your asset allocation plan. Focus on what you can control.
Those are worthwhile pieces of advice during market corrections, but following them can be easier said than done. Indeed, concerned investors may have more questions than answers.
How do they know if the course they're on is the right course? What if they don't know what their asset allocations are, let alone whether they're reasonable? And which factors do they actually control, and how can they control them?
To help investors address those questions and cope with the market volatility in a concrete and productive way, we've put together a market downturn first aid kit. It outlines some worthwhile jobs to tackle during a downturn (or any time, really) along with the tools you need to get them done.
Not only will finding answers to those questions give you more confidence in your plan, it will also serve to distract your attention from activities that aren't helpful, like compulsively checking your portfolio.
Job One: Check Your Stock/Bond Mix
As markets have trended up for the better part of the decade, it’s been easy to let equity winners ride. The net effect of that inattention is that untended portfolios have become progressively more equity-heavy and volatile. A portfolio that was 60% stock and 40% bond in 2009 is more than 80% stock today, even factoring in the recent sell-off.
Morningstar's X-Ray functionality, accessible for Morningstar Premium subscribers via Portfolio Manager or the Instant X-Ray tool, enables you to see how your portfolio is positioned today, taking into account the underlying holdings of the mutual funds in your portfolio. Armed with that information, you can then compare your data with that of a sensible benchmark.
Job Two: See if Your Plan is on Track
Investors naturally wonder if investment downturns will derail their plans. Will retirement need to wait?
The gold standard for getting a check on the viability of your plan is to sit down with a fee-only financial planner (for more on how the planning relationship should work, click here). There are also plenty of online tools available for DIY-ers aiming to get their arms around whether their retirement plans are on track.
Job Three: Check Investment Quality
After you've assessed your portfolio's asset allocation and viability, take a closer look at the quality of the investments you've chosen to populate your plan. Of course, Morningstar.co.uk features a dizzying array of data for stocks, funds and ETFs. Rather than being blinded by short-term gains (or losses), try to focus instead on the big picture.
Do your holdings align with the qualities you've laid out in your investment policy statement (above)? Is your portfolio as streamlined as it can be, or can you identify redundancies, and do your holdings earn strong ratings from Morningstar's analyst team?
Morningstar Premium subscribers can use tools such as our Fund Screener or Stock Screener to identify medallist-rated managed funds or companies, as rated by Morningstar analysts.
Job Four: Check Your Spending
Investors are often exhorted to focus on what they can control during volatiluty. At the top of the "In Your Control" list should be your saving and spending: How much you are able to invest on an ongoing basis will be by far the biggest determinant of when and whether you reach your goals.
A strong market and enlarged portfolio balances can stoke a "wealth effect," making it more comfortable to spend than you otherwise would. If you haven't done a budget recently, there are a host of online tools and apps for tracking your expenses. Alternatively, you can create a budget the old-fashioned way, using an Excel spreadsheet. For more on debt, read our helpful explainer.
Job Five: Check Your Fees
Do you know what you're paying for your portfolio? Most investors don't, even though managing investment costs is one of the best ways to improve your take-home returns.
If you're a Premium subscriber, and have a portfolio saved in Morningstar's Portfolio Manager, you can find valuable summary statistics about what you're paying in the fees and expenses section of the X-Ray overview. If your portfolio's expense ratio isn't comfortably below average, click the X-Ray Details tab, then Fees & Expenses below that, to see how each of your holdings stack up relative to their category peers.
Job Six: Check Your Tax Position
Are you managing your portfolio with an eye on your taxes? If you have taxable, non-retirement holdings, have you populated that portion of your portfolio with investments that limit taxable income and capital gains distributions? It's worth discussing this with your accountant or financial planner.
