For long-term investors, a market correction or bear market may provide little stress. Whether just another bump in the road, or a systematic, prolonged recession is at hand, investors should not simply wait on the sidelines to see how bad things can and will get.
There are many concrete steps investors can take to limit risk in such an environment: here are three of my top suggestions:
Manage portfolio allocation well. Sticking to an allocation of near-100% equities in one's retirement portfolio can be an extremely expensive move, should this bear market turn into a full-blown recession.
Sprinkling in fixed income securities such as bonds, and alternative investments such as real estate into one's portfolio can provide excellent diversification benefits over a long time horizon.
Don't sell low. The inclination for many investors can be to avoid future losses by selling sooner rather than later.
The idea that "cutting one's losses" is a good strategy always amazes me, given the fact that many investors buy back into the market at much higher levels than the levels one exited at, rather than continuing to buy as the market declined - a much more prudent long-term strategy.
Invest in companies with relatively low debt levels. Newsflash: interest rates are on the rise, as is inflation. Buying companies with relatively high levels of debt can expose a portfolio to uncomfortable solvency discussions if Armageddon really is on the horizon.
Manage balance sheet risk accordingly.
Invest wisely, my friends.
