When the stock market gets volatile, retirement investors are naturally inclined to want to do something about it. 

We certainly are at such a point now. The S&P 500 has plunged 21.1% so far this year, as of Wednesday’s close. Last week, it lost 5.8%, its biggest weekly percentage drop since the selloff inspired by COVID-19 in March 2020

But doing “something” while the market is troubled just might be your worst move. The time to act is before the market gets rough, notes Mitch Tuchman, managing director and chief investment officer at Rebalance, an investment management firm focused on passive index strategies. Speaking with me for my Reuters column this week, he said: “It’s very important to anticipate the earthquake, and be seismically reinforced well before it occurs,” he said. 

Anticipating the quake means adhering to three core principles:

  • Diversification: invest in low-cost mutual funds that invest in thousands of companies – far more than you could ever select, track and manage on your own. That gives you a measure of safety, since your exposure to sharp movements in any one stock or market sector is greatly reduced.
  • Balance: Invest in more than one type of asset (typically equities, bonds, and cash securities). This spreading out of investments is helpful because in any given year, one of these asset classes might be up while another is down. Balance helps smooth out the ups and downs. This can be done within a specific fund, or by owning two or three different types of fund that give you a reasonable balance among different investment types.
  • Allocation: Make a thoughtful decision about your exposure to equities that reflects both your tolerance for risk and the goals you are trying to achieve. The challenge at times like this is sticking with that allocation mix as market shifts distort your percentages. This is achieved through periodic rebalancing of the portfolio – when stocks are riding high, you sell enough to bring your allocation back to the targeted level and reinvest the proceeds in an asset class that is down. Rebalancing is a sell-high, buy-low discipline that can boost your portfolio performance significantly over time.

Tuchman notes that markets like the one we’re experiencing now are toughest for do-it-yourselfers accustomed to placing big bets on individual companies or sectors. Over the past few decades, the evidence clearly shows that adhering to the principals I outline above – not stock-picking – yields the best long-term results.

Some people like the thrill of placing these narrow market bets. That’s fine as a hobby – and possibly a very expensive one. You need to be willing – and I do mean really willing – to lose most or all of what you invest. For everyone else, it’s about diversification, balance and allocation. 

Learn more at Reuters Money.