Illustration showing a stock market sell-off and volatility

Stocks continued their downward slide on Wednesday, with the Dow Jones Industrial Average dropping more than 1,400 points, or almost 6 percent. Since its February high, the index is down more than 20 percent, which puts it in bear market territory.

Still, most investors should hang tight, financial advisers say.

This latest market plunge follows weeks of sell-offs, which have been triggered by worries about the economic impact from  the spread of coronavirus, which on Wednesday was officially declared a pandemic by the World Health Organization.

Deepening concerns over the lagging U.S. government response to the virus and the growing risk of a recession helped push the broader S&P 500 and tech-heavy Nasdaq down by 4.9 and 4.7 percent, respectively.

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With this pullback, the S&P 500 is down 1.8 percent for the past 12 months. Still, over the past decade, the benchmark is up more than 200 percent.

“There’s no need to head for the bunker,” says Dan Wiener, chairman of Adviser Investments in Newton, Mass. “The historical evidence suggests this will be a short-term economic and market dislocation.”

That said, it may require a couple of years or more for the stock market to fully recover from these sharp declines. And with the coronavirus still spreading in the U.S., investors are likely to face more sharp market drops in the coming months.

Even so, for investors with a well-diversified portfolio, who have cash on hand for emergencies and short-term needs, it's best to stick with your strategy.

"Oftentimes, the right decision is to keep doing what you're doing," says John Pilkington, senior financial adviser at Vanguard.

But for those who cannot sleep at night, or feel they will need to tap their assets sooner, you may need to take some steps, such as shifting some money from stocks to bonds or cash.

If you’re among this latter group, consider these three investment strategies.

1. Review Your Asset Mix

Chances are you haven’t updated your portfolio allocations lately. Few 401(k) investors make any changes after signing up. But what was right for you in your 20s or 30s may be too aggressive in your 40s or 50s, when your investing time horizon is much shorter.

To figure out what mix works for you now, test your risk tolerance. Say stocks plunged 50 percent, similar to what happened in the 2008 to 2009 bear market. If you hold 70 percent of your portfolio in stocks and 30 percent in bonds, that move might erase one-third of your portfolio. Perhaps you muddled through without panicking in the last financial crisis, but would you be able to hang on now? If you’re married, how would your spouse feel about these losses?

For those who would rather not see a rerun of that scenario—in particular, older investors and retirees—you would do well to shift a portion of your stocks into bonds for a tamer asset mix, says Tom Fredrickson, a fee-only certified financial planner in Brooklyn, N.Y.

If you hold, say, a 70/30 stock-and-bond mix, consider shifting to a 60/40 or 50/50 allocation instead, which would limit your losses. By scaling out of stocks, you will also be locking in some of your profits.

Still, keep in mind that you still need to keep a stake in stocks for inflation-beating growth over the long-term. The flight to safety has slashed the yield on bonds, with the 10-year Treasury note recently yielding just 0.8 percent, down from 1.87 percent in January and far below the inflation rate, recently 2.5 percent.

2. Rebalance Your Portfolio

Choosing an asset mix does no good if you don’t maintain it through rebalancing. Someone who started in 2012 with a 60/40 stock-and-bond mix and failed to rebalance might have closer to a 70/30 mix today, as a result of the big gains in stocks and modest returns on bonds.

Though a sustained market decline could bring your portfolio closer to the original allocation, a better strategy is to rebalance, says Fredrickson. To do this, sell just enough of your winning investments and add that money to your laggards to bring your portfolio back to its original allocation or to the one that’s right for you today.

An even simpler strategy is to opt for an all-in-one fund, such as a target-date retirement fund, that automatically rebalances for you across a wide range of assets.  

3. Step Up Your Saving

Although you may not be able to earn hefty returns in the coming years, there’s one key factor you can control, says Fredrickson: your savings rate. Boosting the amount you stash away means you will be less dependent on high returns to reach your financial goals. And you don’t have to take a lot of risk to get there.

To make sure you save more, automate your contributions, starting with your 401(k) plan, and try to put away the max, which is $19,500 in 2020. (Those 50 and older can put away an additional $6,500.) For IRA investors, the max is $6,000; those 50 and older can contribute an additional $1,000.

Can’t save that much? Hike your contribution rate another percentage point or two for now and aim to increase it more in the future. And if you get a raise or receive a windfall, stash some or all of the money away. That way, your portfolio will stay on track whatever the market does.