A plan of action amid market volatility

The end of February saw the worst week for stocks since the heart of the financial crisis. Just six days after the S&P 500 index reached a new all-time high on Feb. 19, it fell by more than 10%, its fastest correction ever, mostly due to the uncertainty arising from the spread of coronavirus.

Given the speed and depth of the sell-off, you are probably wondering what to do. Read on for a refreshed version of my investor panic protection plan.

Warning: This will not protect you against market downturns — those will happen from time to time. Rather, the process is intended to help protect you against yourself, and to prompt you to consider specific action items that will help you remain on track with your financial goals.

Remind yourself why you are investing: Most of us are saving for a long-term goal, like retirement or college, which is likely years or decades in the future. Even if you are retiring in the next couple of years, your account needs to last 20 to 30 more years. That thought should help soothe some of your raw nerves. And as money comes out of your paycheck or savings and goes into investment accounts, you’re purchasing shares at a discount to levels seen recently. Who doesn’t like a bargain?

Be thankful for your diversified portfolio: As stocks tanked, bond prices soared (the yield on the benchmark 10-year Treasury note fell to an all-time low), which should have shielded you from the worst of the stock selling. Maintaining a diversified portfolio of stocks, bonds, commodities, and cash is usually a winning strategy for most long-term investors. And if you haven’t done so already, establish automatic rebalancing on investment accounts (one to four times a year) so that your allocation reflects the level of risk on which you originally decided.

Determine whether you need cash: Do you need to make a house down payment, purchase a car or pay a tuition bill in the next 12 months? If so, that money should never have been be at risk at all, so admit that you blew it and get whatever you need out of the stock or even the bond market and keep it in a safe savings, checking or money market. Check your risk tolerance: Sure, you felt bold when stock market indexes were making new highs, but how did you feel when the tide turned? Maybe you can’t stomach as much risk as you thought you could. If that’s the case, you may need to readjust your allocation. Here’s your warning: If you do make changes, do not jump back into those riskier holdings after markets stabilize. You need to make a pinky swear with yourself that you will stick to your revised plan.

Reduce the cost of your home loan: With benchmark interest rates plummeting, now is a great time to consider refinancing your mortgage, especially if you have an adjustable rate or a balloon loan. Run the numbers and factor in the costs of the refinancing (usually 2% to 5% of the loan amount) into your analysis.

Find free money: If you want to help yourself feel better about market losses, figure out how much you are paying in investment fees and determine if you can scoop up free money. Can you replace an actively managed fund with a no-commission, low expense index fund? Could you replace a so-called adviser, who isn’t doing much to improve your bottom line, with an automatic investment platform at a fraction of the price?