Doing Nothing About a Market Decline

A reader writes in, asking:

“The performance in my Roth IRA has been all over the place lately. I recently had a day where literally all four of my funds went down. What do you do differently during periods when nothing is performing well?”

I’ve gotten a few questions like this lately. And you can see the same thing happening on the Bogleheads forum too. For anybody who started investing in March of 2009 or later, they’ve never really experienced a bear market. So little bumps like we’ve seen lately are new and scary.

And to be clear, what we’ve experienced in the last few months is just a little bit of bumpiness. Vanguard Total Stock Market Index Fund is down about 5% over the last 3 months. But it’s still up, year-to-date. Compared to the 2008-2009 decline during which the market fell by more than 50% (or the 2000-2002 decline during which it fell by very nearly 50%), what we’ve seen in the last few months is nothing.

Nothing at all.

And as it happens, that’s also the answer to the reader’s question about what we’re doing differently with our portfolio as a result of the recent bumpiness: nothing.

My wife and I are just contributing to our accounts and buying the same LifeStrategy fund as always.

If you have an appropriately diversified portfolio that is suitable for your risk tolerance, there are only a few things to do during a market decline:

1. Rebalance, if your plan calls for such. (Quick note on definitions: rebalancing is not changing your targeted allocation. It’s moving your current allocation back to your targeted allocation. It is not a change in plan, but rather an implementation of the already-existing plan. Rebalancing generally means buying more of whatever has been performing the worst recently.)
2. Tax-loss harvest if you have holdings in taxable accounts.
3. Cut spending, if you’re retired and spending from your portfolio and your retirement plan calls for such.

That’s it. Obsessively checking your portfolio to see whether it’s up or down from yesterday doesn’t help. And trying to predict whether it will be up or down tomorrow doesn’t help either.

In our case, we use an all-in-one fund that is automatically rebalanced, so there’s no need to worry about that. And essentially all of our holdings are in retirement accounts (we have high contribution limits, due to self-employment income), so there’s no need to worry about tax-loss harvesting. There’s no need to do anything at all.