Inaction shouldn’t be for the sake of inaction either, and there are times when you should do something with your portfolio. However, this should not be because of the fear or emotional stresses you face when your portfolio declines in a market downturn.
The reason to make adjustments can include the rapidly changing fundamentals that a downturn brings along with it. For example, during this particular downturn, if you have been investing in the aviation sector or hospitality sectors, you may realise that these industries are going to bear the brunt of safe distancing measures implemented worldwide.
You should also only adjust your portfolio if you feel the fundamentals of the companies have been affected, which impacts their longer-term sustainability as a business.
Another occasion you can consider doing something with your investments is when you are entering a different life stage and want to take less risk with your investments.
For those looking at retirement on the horizon, they cannot afford a downturn wiping out 20% to 25% of their retirement nest egg, as they need to start drawing down the funds to use when they stop working soon.
For those just starting in their careers, shaving 25% off their investment value will be painful as well. However, they have a greater chance to recover by continuing to remain invested and ploughing more funds into the markets over the next three or four decades.
This is mainly because they have time on their side to ride out the current and any future downturns, as well as enjoy the power of compound interest over a longer time horizon.