If you have any money invested in the stock market, I’m sure you are feeling the pain of seeing the value of your holdings evaporate into thin air. At this current moment in time, putting money into the stock market is what I imagine putting money into an incinerator feels like.
Beyond this volatile market, the pinch of inflation is real, interest rates are on the rise, and folks are fearing a recession. Before you start to panic, there are a few things you should take into consideration as you navigate this market.
Let’s talk about how you should choose to combat the downturn. Oh yeah, none of this is investment advice. Please consult your financial advisor for such things.
Don’t panic
The stock market, as a whole, is constantly in flux. Sometimes, despite dips, the market trends upward for a long period of time. This is called a bull market. Think about how a bull uses its horns, scooping upward.
A downward trending market is called a bear market – technically, to be considered a true "bear" market, the downturn must be 20% or more from recent highs. A good way to remember this is how a bear swipes down with its paw. Remember, folks: ups and downs are all a normal part of investing in the stock market.
Although the economy, which is a measure of how money is being made and spent in a country, is not the stock market, there seems to be a correlation between how the economic cycles and the fluctuations in the stock market.
When to start preparing
Preparing for bad economic times happens during good economic times. Think about it: it’s much easier to save and invest when you’re gainfully employed during good economic times than when you're unemployed and in a recession.
Although your investment strategy during good times and bad times is likely to be quite similar, during downturns, you might cut back on spending, revisit your budget and put more cash into your emergency fund. Not every fluctuation in the stock market is a sign to make drastic changes. It’s normal to feel overwhelmed or panicky, but that doesn't mean you must always act on those feelings of panic.
Whatever changes you decide on, you'll want to try your best to stay cool, calm, and collected. Which is sometimes much easier said than done.
Our market downturn tips
One good thing that comes from these moments of panic is the realization that you should probably take a look at your finances and find ways to fortify them through the inevitable downturns.
Here are a few of our market downturn tips:
Build up your cash reserves
Having cash on hand can help you avoid selling any investments when they’re already down. Start with an emergency fund. A well-funded emergency fund is the first line of defense when it comes to a financial or economic shock. Some extra reserve might be a good way for you to feel at ease.
An emergency fund provides you with peace of mind, which means you're less likely to sell off in a panic, giving you the reassurance you need to ride out the turbulence.
Having extra cash during a downturn could also allow you to invest in opportunities that will pay off in the long run.
DCA all the way
The investment strategy that's tried and true is dollar-cost averaging, or DCA. It’s a way to systematically invest equal amounts of money at regular intervals.
The most common way to DCA is to invest a portion of every paycheck no matter what the market is doing. For example, investing 10% of your paycheck into your retirement account. This strategy can reduce the overall impact of volatility. And in the long run, lower the average cost per share.
Diversify your portfolio
Diversifying is a way to spread out your risk. For example, instead of just buying Apple stock, a diversified portfolio may invest in a fund that holds Apple stock, along with one hundred other tech companies of various sizes that operate in various niches and parts of the world.
Think about it like this: instead of walking up to a Roulette table and placing a single, $1,000 bet, you’d spread out some of the money across many bets. And not only that, you’d make bets at different tables and on different games in different casinos around the world. Of course, this isn’t a perfect analogy because diversifying is a way to combat the inherent risks in gambling.
Think long term
A long-term mindset is a must for any investor. There will be some ups and downs, but if you're able to weather the storm, you'll be able to reach your long-term goals quicker.
If you're constantly checking your portfolio, wondering if you need to sell or if you should hold tight, you'll start stressing yourself out.
We get it. We're all guilty of it. But food for thought: if you sold off during every moment of downturn, will you ever reach your long-term goals? There will be bull markets, and there will be bear ones and a lot of them!
Ask yourself: do you actually need to do anything?
Sometimes, sticking to your original plan is the best plan. Instead of trying to predict the stock market’s next move, focus on your long-term goals. What do these goals look like? What can you do every week, month, or year to get closer to your long-term goals? At the end of the day, you want to know what you want your money to do so you can know what to do when the stock market is in a downturn.
Shift your focus to other things
Money is necessary. The feeling of safety and security helps contribute to our well-being. This isn’t encouragement to ignore your financial life, rather, it’s encouragement to appreciate other aspects of your life while the market is in the shittier and the economic outlook is frustrating. Find joy in your relationships, creativity, and the work you’re putting out into the world. Learn new skills or sharpen existing ones. Test business ideas. Try to become Tik Tok famous. Appreciate that shitty economic times will pass.