In this article

Preparing in advance for occasional market drops Addressing your risk The benefits of value investing Market declines can be healthy

A period of falling stock prices — a correction or bear market — is defined as a time where major market indexes drop at least 10%. When stock prices are falling, some investors find themselves trapped in a vicious emotional cycle. Fear of losing money can lead to a quick, poorly planned investment decision.

Investors who have prepared their portfolio for occasional market drops generally are better able to manage their emotions when stock prices head south.

Be Prepared: Assess Your Portfolio Now

To manage your fear of a market correction, take time to review your portfolio. Are all your investments in stocks or stock mutual funds? Do you own just one stock mutual fund? Have you invested in only a few high-flying stocks?

Remember, all investments involve risk. As a long-term investor, you can afford to weather short-term price changes. But you can also make the long journey a little more enjoyable by taking a few steps to help protect your portfolio. Here’s a short list of some risks you face as a holder of stocks or stock mutual funds, and some ideas about how to help manage the risks in your portfolio.

Address Your Risks One By One

Market Risk

Market risk is common to all investments. If stock prices fall by 10%, market risk says your stocks or stock mutual funds are likely to drop in price as well. You can help manage market risk to stocks by allocating part of your portfolio to other assets, such as bonds or bond mutual funds and Treasury bills or money market funds.* When stock prices decline, it’s possible that a rise in your bond or money market investment may help cushion the fall.

*An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

Under Diversification.

If you only own a couple of stocks, your portfolio is extremely vulnerable if one suffers a big decline. Also, it’s important that each stock in your portfolio be in a different industry group. Owning eight computer-related stocks will do you little good if the prospects dim for the computer industry.

In addition, you can help manage risk by holding a few stock mutual funds with different investment objectives.

Volatility.

This is less of a concern for the long-term investor. Someone who is investing for retirement in 30 years should not be too concerned if the investment bounces around from one day to the next. What is important is that the investment has the potential to perform up to expectations in the long term. You can help manage volatility risk by investing the money you may need in the next five years in a more conservative investment. You can be more aggressive with the money you earmarked for use in 15 to 20 years, if that would be suitable for you.