3 Ways to Prepare for a Stock Market Downturn
After back-to-back years of 20%-plus gains for U.S. stocks,1 unpredictable policy changes are making 2025 a much rockier ride. Here, a Schwab financial planner and two wealth advisors offer guidance for investors looking to make the most of an uncertain situation.
Worried about losing ground?
"Even in a bear market, you should be in good shape if your portfolio mix matches both your time horizon and risk tolerance," says Tracey Lehmer, CFP®, CWS®, a financial planner for Schwab Wealth Advisory. "If you have many years of saving ahead of you, you can probably afford to take on more risk—and the potential losses that come with it—in exchange for the potential growth prospects.
"If you're nearing a major goal such as retirement, shifting to a moderate to conservative mix can typically help insulate your savings from a major market decline. This strategy could be especially apt if the stock market gains of the past couple of years have left you better positioned to meet your retirement or legacy-giving goals.
"Whatever your situation, your portfolio balance could be overweighted to stocks as a result of the market's strong run, so review your holdings regularly to help keep your risk exposure in check."
Review your current asset allocation, then reach out to your Schwab financial consultant to help determine whether it's right for your current circumstances.
Wanting to play defense?
"You can manage your risk exposure while maintaining your asset allocation by taking a slightly more defensive stance with your investments within each asset class," says Randall Sims, CFA®, CPWA®, a senior wealth advisor for Schwab Wealth Advisory. "For example, mature dividend-paying companies, particularly those that regularly increase their payouts, generally have strong financials and often fare well during periods of market volatility.
"You might also consider stocks in developed (as opposed to emerging) foreign markets, which often pay higher dividends and have lower valuations than U.S. stocks.
"Yet another way to play defense is with stocks in sectors such as consumer staples, health care, and utilities, since consumers rely on these industries regardless of how the economy is performing."
To research defensive stocks for your portfolio, log in to Schwab's Stock Screener:
- Under Dividends, select Increasing or Decreasing Dividends – YOY, then select Increasing.
- Under Basic, select Sectors and Industries, then select one or more Sectors, Industries, or Sub-Industries.
Looking to buy low?
"Some investors actually welcome a downturn because it allows them to buy more shares for the same amount of money—which is a great mindset to have, so long as you don't try to time the market," says Eron Dahl, CFP®, CWS®, CPWA®, director and senior wealth advisor for Schwab Wealth Advisory. "Indeed, Schwab's own research has shown, again and again, that the 'perfect' time to invest is as soon as you have the money, because it's nearly impossible to predict when the market will hit bottom, even among professional stock pickers."
1S&P Dow Jones Indices, as of 12/31/2024. U.S. stocks are represented by the S&P 500® Index.
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Past performance is no guarantee of future results; the value of investments and the income derived from them can go down as well as up. Future returns and the achievement of stated goals are not guaranteed, and a loss of principal may occur.
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
Investing involves risk, including loss of principal.
Diversification, asset allocation, automatic investing and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets.
There are risks associated with investing in dividend paying stocks, including but not limited to the risk that stocks may reduce or stop paying dividends.
International investments involve additional risks, which include differences in financial accounting standards, currency fluctuations, geopolitical risk, foreign taxes and regulations, and the potential for illiquid markets.
Schwab Wealth Advisory™ ("SWA") is a non‐discretionary investment advisory program sponsored by Charles Schwab & Co., Inc. ("Schwab"). Schwab Wealth Advisory, Inc. ("SWAI") is a Registered Investment Adviser and provides portfolio management for the SWA program. Schwab and SWAI are affiliates and are subsidiaries of The Charles Schwab Corporation.