Actively investing in the stock market takes both a level head and a steady hand — it won’t always be smooth sailing. After reaching record highs earlier this year, the stock market fell for a third consecutive day on Monday, with the Dow Jones Industrial Average plunging more than 1,000 points.
Markets panicked as they reacted to Friday’s unexpectedly weak US labor report. It came amid worries that the Federal Reserve had left interest rates too high for too long, leaving many nervous about a slowing economy and possible recession.
But just because you see red on your investing apps (if you were able to get into them) doesn’t mean you should hit the panic button just yet.
“Longterm investors should not let a bad day or two in the markets derail their financial plan,” said Aaron Sherman, president of Odyssey Group Wealth Advisors. “Market drops like these happen quite frequently. While we can’t predict when they will come, they’re inevitable, which is why investors should make sure their short-term spending needs are covered by income and/or cash on hand.”
Whether you’ve invested a few dollars in a favorite company or stowed away a lifetime of savings in a retirement account like a 401(k) or individual retirement account, you’re likely doing it to watch your money grow. It can be stressful to watch your investments take a dive, even if it’s temporary.
Why you’re seeing red
Investing is inherently risky. Even in the best of times, you’re likely to see some volatility in your investments. When you buy a stock, you’re essentially purchasing a piece of a company. When that company does well, so will your stock. However, the same is true should the business do poorly.
Despite some online perceptions of “stock only goes up,” it’s only natural for the market to go the other way sometimes. In addition to business performance, whenever big economic events take place, like last week’s Fed meeting and jobs report, it affects the market.
If you’re feeling stressed about the state of your portfolio, take a beat and consider these tips from Shang Saavedra, founder and CEO of Save My Cents.
Take emotions out of your investment strategy
Investing can certainly get emotional, whether your portfolio is doing well and you feel encouraged and excited, or it’s doing poorly and you start to stress and worry.
“Always remember that there is risk when it comes to investing — it is about managing your emotions,” Saavedra told CNET.
Keeping your emotions out of your finances can be easier said than done, of course. Many people look to their investment portfolios to bolster their savings or as their main source of income for retirement. Sherman suggests analyzing your short-term needs before pulling money out of your investment accounts.
“If you have an account that you don’t plan to touch for several years, then the investments in that account have a long-time horizon to recover from this and any other future market turmoil that comes our way,” he said. “As long as your short-term spending needs are taken care of by your income and cash holdings, you will be well-insulated from market volatility.”
Know your risk tolerance
Your risk tolerance — how comfortable you are taking on risks in the stock market — should be baked into your core investing strategy.
It’s your money, so of course the stakes are high, but it may help to think of them another way.
“I often ask people, how would you play poker?” Saavedra said. “If you had a bad hand, do you fold right away?”
Of course, that doesn’t mean you should always do nothing. It all comes down to your risk tolerance.
If you’re risk averse, then you might want to consider moving more conservative investments to your portfolio, like government bonds and certificates of deposit. If you’re willing to risk more to get a greater return, you have to stay at the table. But the best likely bet is to have a diverse portfolio to help spread out your risk.
“The more diversified your investments across asset types, sectors and geographies, the less likely that all of your investments would be equally and negatively affected,” Saavedra said.
Remember why you started to invest
When you first began investing, it was likely to grow your savings or prepare for retirement. Your longterm goals shouldn’t change, regardless of whether there’s a recession.
“If you’re in your 20s to 50s, you’re likely [at least] 10-plus years away from retirement,” Saavedra said. Recessions do not typically last 10 years, which means that your investments have time to recover after the uncertainty in the markets ends, she added.
Diversify with less risky investments
There are ways you can prepare for an uncertain economic future. Consider putting some savings into a high-yield savings account or laddering CDs, which could help protect your savings amid the current economic uncertainty.
“Your investments should be aligned with their ultimate purpose within your portfolio,” said Sherman. “If you expect to pull significant amounts out of the market for upcoming expenses, you should set those amounts aside in cash (savings accounts, money market, CDs, etc.).”
And if you don’t have one, now’s the time to build up an emergency fund. It might not be easy at first, but you’ll be glad you have one should the need arise. An emergency fund can go a long way toward getting you through turbulent times.
At the end of the day, remember that stock market fluctuations are normal. As for what’s next, Sherman recommends staying in tune with what’s happening in the economy, but not panicking and checking your portfolio every day if it’s leading to more stress.
“Stock markets are fickle, emotional and notoriously hard to predict,” said Sherman. “One could certainly argue that the recent downturn is overblown and exaggerated, but so much of that depends on future economic news that we haven’t seen yet.”
