When Things Are Looking Down…
Photo by Ussama Azam on Unsplash.
It's never fun to see your investment balances going down. And there's a good chance that's exactly what has been happening to your portfolio the past month or so, with all this talk of tariffs, trade wars, and global slowdowns. You're welcome for the reminder. But how should we be thinking about our investment portfolio when things are looking down?
Let's take a step back and think about the role of different components of your portfolio.
When stocks go down
What has been going down lately? Stocks.
What's the role of stocks? To provide long-term growth.
Of course, everyone wants short-term growth too. But that's not why we should be holding stocks. They are volatile by nature. They can't be trusted to produce good returns over short periods of time.
You're most likely in one of two situations:
You're young and/or in the workforce and are many years from retirement.
You're currently retired or soon will be.
If #1 describes you, stock market downturns shouldn't faze you much. Like I said above, of course, it doesn't feel good. But you likely won't need to tap into your investments for many, many years, giving the stock market time to recover.
If you will need the money in the coming years, then much of the discussion below will apply to you.
If #2 describes you, then you might be feeling more anxious about a potential major stock market downturn. If that's you, I encourage you to think in terms of the different components of your investment portfolio and their respective timeframes.
Let's talk more about that.
Components of an investment portfolio
Here are the three main components of a diversified portfolio:
Cash
Bonds
Stocks
Note #1: I'm not including Real Estate in this discussion, even though it plays an important, distinct role in someone's overall asset allocation. In this discussion, I'm only looking at cash, bonds, and stocks.
Note #2: There are other potential diversifiers that are a bit more on the fringes, like gold, commodities, private equity, etc. But I think most people shouldn’t be considering those.
So how should we be thinking about the three main components listed above?
In a very real way, you can think about these three asset classes in terms of timeframes. That is:
Cash: Money you'll need in the short-term, for example, within the next 6 months to 3 years.
Bonds: Money you'll need in the medium-term, for example, within 2-10 years.
Stocks: Money you'll need in the long-term, for example, not until 10 years from now.
Cash
Cash is where you want to keep your short-term money.
"Short-term" will mean different things to different people, but generally speaking, I'd say most people should have between 6 months to 3 years of spending in cash.
It might be 6 months for someone who's still working, essentially acting as an emergency fund.
And it might be 1-3 years for someone who is retired, who is depending on their investment portfolio to provide for their lifestyle.
So, why hold so much in cash? Because you don't want short-term fluctuations in the markets & economy to affect your ability to live your life.
It gives increased peace of mind to know that, no matter what happens in the markets, the upcoming 1-3 years of spending is covered.
By the way, when I say "cash", it could be in the form of physical cash, money in bank accounts, CDs, and/or short-term Treasury bills/notes.
Bonds
Our next asset class is bonds (also called fixed income).
Bonds are more volatile than cash, as they can go up and down in value, but aren't nearly as volatile as stocks.
I think bonds are a great place to park your medium-term money. How much that ends up being will likely depend on your risk tolerance, but it usually ends up being enough to cover many years of spending. For example, if you have 2 years of spending in cash, you might have another 8 years of spending in bonds.
This also provides fantastic peace of mind, knowing that no matter what happens to stocks, you have many years of spending in relatively safe bonds.
Another great thing about bonds is that they tend to do well when stocks do poorly. That is, if your stocks are going down, there's a good chance your bonds are increasing in value. Not always, but usually. As an example, during 2025 so far, US stocks are down by about 3%, while US bonds are up by about 3%. So they offer fantastic diversification benefits.
Quick definition: When I say "bonds", it could be in the form of individual bonds (U.S. Treasury bonds, corporate bonds, municipal bonds) or in mutual funds or ETFs that are composed of bonds.
Stocks
Let's quickly talk stocks.
First off, you should expect that there will be a lot of volatility.
What's volatility, you ask? It basically means there will be times when your stocks go way up and times when they will go way down.
In other words, it will be a bumpy ride.
That's why you should always approach stocks with a long-term horizon. If you'll need the money anytime soon, say within the next several years, that money should not be invested in stocks.
The beauty in having this long-term horizon is that it can (and should!) free you from worrying about the daily, weekly, monthly, and even annual, gyrations of the stock market.
You should be able to wait out the inevitable downturns of the stock market, as long as you have faith that the stocks will rebound at some point during your holding period. If you have 3 years of spending in bonds, then that's your holding period for stocks. If you have 15 years in bonds, that's your holding period for stocks. As long as the stock market comes back within that time period, you should be fine.
Buckets
Some investors take this idea to heart by creating "buckets". They have a bucket of money in cash, a bucket of money in bonds, and a bucket of money in stocks. Perhaps even with each bucket being in a different account. They take money from the cash bucket for spending, and then replenish it from the bond bucket each year, and replenish the bond bucket from the stock bucket periodically.
There is something mentally attractive about this idea, but I'm not convinced it's necessary. It's not an approach I take with my clients. Having said that, the method I use still applies the principles and spirit of the approach.
I prefer to rebalance. By regularly rebalancing (check out my blog post about this here) you're essentially taking advantage of the same dynamics, just less rigidly. Investment rebalancing is the process of realigning the weightings of the assets in your portfolio. This typically involves periodically buying or selling assets to maintain your desired asset allocation.
For example:
Let's assume your target asset allocation is 50/50 (which means 50% stocks and 50% bonds/cash).
If stocks go down by a major amount, say 25%, and your bonds remain at the same value, then your asset allocation becomes 43/57 (43% stocks, 57% bonds/cash).
When it comes time to make a withdrawal, you should rebalance at the same time, meaning you would take the money from the 57% bonds/cash position and bring it closer to the 50% mark.
That would mean you would be leaving the stock position alone and wouldn't sell any.
That gives the stocks time to rebound before you sell them.
Moral of the story
If your investment portfolio has taken a hit lately, don't despair. It doesn’t feel good, but try to keep in mind that you won't need to sell the things that have gone down in value anytime soon. Stay the course, my friends.