Market Correction: Time to Take “Stock” of Your Portfolio

As every experienced investor knows, the stock market is cyclical. Just like the old adage, “whatever goes up must come down.” What is not a sure thing, however, is the effect that a market downturn will have on your portfolio. Investors, who are well informed about what is going on in their accounts, are much better equipped to safeguard their investments.

A market correction, or pullback, is a temporary decline of at least 10% in the market in a relatively short period of time. Corrections usually last for 2 months or less. A decline of 20% or more that lasts for 2 months or more is considered a bear market. Historically, market corrections have occurred once per year. Some say corrections are necessary evils to help overpriced issues return to their actual value or “supportable levels.”

While no one can predict a market correction, there are things you can do to ride out the storm and hold on until a bullish market returns.

MEET WITH YOUR FINANCIAL ADVISOR PERIODICALLY

The more information your broker has about you and your current circumstances, the more likely he or she will be able to provide suitable investment advice to you.

• Periodically review your diversification and asset allocation objectives to see if they need to be tweaked, especially in light of current market conditions.
• Discuss any impending life changes that could impact your financial circumstances, liquidity and income needs, e.g., change in employment, serious illness, elderly parents, child starting college.
• Revisit the amounts of any recurring withdrawals and account distributions to ensure that the value of the investments in the portfolio can support the debits without invading principal.

MAINTAIN A DIVERSIFIED PORTFOLIO

Lack of diversification can occur in three contexts:

• Too much in one position. Most firms recommend that no more than 5%-10% of the account be invested in any one position.
• Too much in one sector, e.g., technology sector or banking sector.
• Too much in one asset class – stocks, bonds, cash or alternative investments.

Check if your brokerage firm has published “asset allocation” recommendations based upon investment objectives and risk tolerance. As an example, one major firm recommends that a “conservative” investor’s portfolio should hold 20% stocks, 55% bonds, and 25% cash. If the asset allocation recommended by your broker differs from the “template” recommended by his or her firm, ask why.

CONFIRM YOUR ACCOUNT INFORMATION

• Is your address reflected correctly?
• Does anyone else have a power of attorney over your account? Is that reflected?
• If you requested that duplicate statements be sent to a third-party, such as your accountant, is that shown on your statements?
• Is the investment objective reflected on your client profile correct?
• Does the firm have your correct employment and income reflected on your account documents?

READ YOUR ACCOUNT STATEMENTS

Tempting as it might be to leave those statements unopened and spare yourself the distress of seeing your declining balance, you should read your account statements to determine if any non-performance related problems exist in the accounts. A declining market could disguise losses caused by negligence or malfeasance of the broker or firm. Here’s a checklist to help you identify potential problems that need to be addressed:

• Do the statements reflect purchases or sales that you did not authorize?
• Are there any cash transfers that you did not request?
• If you have a cash management account, do your statements reflect checks that you did not write or debit card transactions that you did not authorize?
• Are the amounts of the cash withdrawals and deposits correct?
• Do the statements show your anticipated dividend and interest payments?
• Are the specific positions that you believe you hold reflected on your statement?
• Does the portfolio match your diversification objectives?
• Do your holdings match your asset allocation objectives?
• Do there seem to be an excessive amount of trades every month?

If you suspect that your broker or the firm may be engaged in misconduct, you should seek the advice of a lawyer who has expertise in the area of securities arbitration. Our firm handles these cases on a contingency fee basis and offers a free client consultation.