Riding a Market Cycle

You can deal with market cycles defensively by resisting the impulse to sell off your holdings when your portfolio is losing value. Although it’s a good idea to shed individual investments over the long term that aren’t meeting your expectations, it’s almost never smart to sell extensively when an entire asset class is slumping. You might be selling an investment for the wrong reasons and taking a loss in the process. And you won’t be in a position to benefit when the market bounces back, since you’ll no longer own the investments that may increase in value.

Another, and perhaps more effective, way to deal with market cycles is to be proactive. This means when investment prices are falling across the board, it’s often time to buy. You’ll not only pay less for stocks, but when the market rebounds — as it invariably has — you’re positioned to share in the gains.

You can also adopt an asset allocation strategy to ensure your portfolio always contains a variety of asset classes, including some that correlate and others that don’t. For example, if you always own stocks and bonds in the proportion you’ve determined suits your goals, time frame and risk tolerance, you’re positioned to benefit from whichever of the two asset classes is providing the better return at a given time. (Editor’s note: Some people don’t see any reason to own anything other than stocks. They view asset allocation as an attempt at market timing and a way for some brokers to generate commissions by increasing transactions.)

Market cycles are a fact of investing. Over time adopting a strategy to capitalize on them, rather than buying and selling impulsively in response to immediate market fluctuations, can potentially yield far better results.