Protecting Your Portfolio: 4 Secrets to Stay Rich
Discover the Strategies That Saved My Investments During Market Crashes
Hello everyone and I hope you are having a great day.
I want to talk about recessions today.
I think this is a very useful topic for our subscribers, new to investing and well-seasoned. Of course, it seems to be a bit off topic as the S&P 500 has had double digit returns, year over year, but nonetheless, I would like to create a resource for those who have not experienced a “real” recession or for those that have, help you with some reminders of how to proceed.
Market volatility can ruin a person’s investment portfolio and send them back 5, 10 or even 20 years. I understand the concern of losing money and making huge mistakes during recessions. That is why I believe a more structured portfolio of equities and bonds is a more productive way to invest as it relates to drawdowns and the psychological aspects.
This guide is going to give you the 4 essential strategies to manage both investments and emotions during recessions. These ways have helped not only me but countless other investors maintain their composure through a difficult time.
Here are the Four:
Choosing Quality
Learning From History
Rebalancing Your Portfolio
Managing Your Fears
Choosing Quality
Now this one is a no brainer. The best defense against a recession is owning rock-solid companies or following time-tested and quality investment strategies with proven track records. When you build a properly structured portfolio, you're essentially planning for market drawdowns before they happen. This means smartly spreading your money across different investments like stocks and bonds, each serving its purpose in your strategy. Think of it this way - having high-quality investments in your portfolio isn't just about reducing losses during tough times; it's also about helping you sleep at night when markets get rocky. After all, it's much easier to stay the course when you trust what you own.
Learning From History
Markets have always recovered from downturns, even if it takes time. One of the best ways to understand this is to look at history and study how past bear markets and recoveries worked. The length of bear markets can vary wildly. Here a couple examples:
2020 COVID Crash (Unusually Fast)
Peak to Bottom: 1 month
Recovery: 5 months
Total Time: 6 months
2000-2007 Dot-com Bubble:
Peak to Bottom: 2.5 years (Mar 2000 - Oct 2002)
Recovery: 5 years
Total Time: About 7.5 years
Mind you, 2020 is not typical. If you think that is a bear market, then you are in for a rude awakening. The thing most people care about is how long it takes for them to get back to even once they have lost. Well, the average time is about 3.3 years. This includes Peak → Bottom → Recovery.
Remember, time in the market is more important than timing the market. Understanding that simple fact can make these recessions much more bearable.
Rebalancing Your Portfolio
Rebalancing Your Portfolio - the hardest part for most investors during a recession. Here's why: when you set a portfolio allocation, any major market movements will throw this balance out of whack. During a recession, as stocks plummet, your natural instinct is to run away from equities. However, proper rebalancing demands the exact opposite - you need to sell what's doing relatively well (typically bonds during a stock market crash) and buy more of what's falling (stocks). I know it sounds counterintuitive, and that's exactly why most investors fail to do it.
Think about this - during the 2008 recession, investors who stuck to their rebalancing strategy were essentially buying stocks at massive discounts, even though it felt terrible at the time. This is why I always recommend setting up a systematic rebalancing schedule, whether quarterly, annually or having a threshold, and sticking to it regardless of market conditions or how you feel.
Remember, successful investing isn't about feeling good in the moment; it's about following a disciplined process that puts the odds in your favor over the long term. And just like we discussed with our quality investments earlier, having a structured portfolio makes rebalancing much more manageable during those inevitable market downturns.
Managing Your Fears
Watching your portfolio drop 20%, 30%, or even 50% is terrifying. I've been through multiple market crashes, and I can tell you firsthand that the emotional toll is far worse than any mathematical calculation can show. The natural impulse is to do something - anything - to stop the bleeding. But here's the critical lesson: your emotions during a market crash are often your worst enemy.
Instead of making snap decisions based on fear, I've developed a three step system that works for me, and I suggest you create one too.
First, whenever I feel that panic rising, I write down exactly what I'm worried about. It sounds simple, but getting those fears out of your head and onto paper helps separate emotional reactions from rational thinking.
Second, I review my long-term investment plan and remind myself why I chose these investments in the first place.
Third, I make it a point to avoid checking my portfolio daily during severe downturns - nothing good comes from watching every tick of the market when you're investing for decades.
You must ask yourself, have the fundamental reasons for owning these investments changed, or am I just reacting to market noise?
Remember, your investment timeline is likely years or decades, not days or weeks. The worst financial decisions I've seen (and made) came from short-term emotional reactions to temporary market conditions.
Conclusion
Market crashes and recessions are temporary, but the investing habits you build will last a lifetime. We covered choosing quality investments you understand, learning from market history, maintaining discipline through rebalancing, and managing those tough emotional reactions that can wreck a portfolio. Take one step this week - maybe set up a regular rebalancing schedule or write down your investment thesis. Remember, building wealth isn't about timing the perfect entry or exit - it's about staying in the game long enough to let compound interest work its magic.