How often do they occur
If we look at the Dow Jones Industrial Average since 1900 we can see market declines have happened quite frequently. A decline of 10% or more has occurred about once a year on average. A decline of 20% or more has occurred about once every 3.5 years on average.
What can you do to prepare
|Asset||Allocation||Market Value ($)||Stress||Stress Loss ($)|
The benefit of diversification is apparent. Stocks fell 15% in this scenario yet the overall portfolio is only down 8.5%. The more stocks you own when valuations are high, the more likely you will see larger losses in a downturn. Similarly, rebalancing from bonds to stocks after a market shock will be beneficial when valuations are low.
- Market declines are unpredictable but are going to happen.
- Having a plan will help you be ready when they do occur.
- Rebalancing between stocks and bonds will help to reduce risk and potential losses in a market downturn scenario.