4 Things To Do When The Stock Market Crashes
The stock market hasn’t gotten off to the best start this year.
As of Friday, it’s down 7.6% year-to-date:
You’ll probably see many headlines throughout the year about a market crash and the media’s job is to drive clicks, which is usually driven by triggering emotions, like fear.
So instead of creating fear, today’s newsletter is walking through 4 simple things to do when the stock market is losing value:
Keep the big picture in mind
It’s easy to let short term price movement affect how you view the stock market. If you've invested money in the market within the past couple of years, things have been fairly smooth sailing.
But now, we’re starting to see questionable economic moves made during the pandemic catch up to us.
When you have money in the market and the prices drop, it can be tough to stomach. However, it’s important to remember that drops in the market are necessary to a healthy, functioning stock market.
And if you’re investing, you should generally be in it for the long term. If you’re not, you may actually be trading - which is an entirely different, short-term approach to the market that requires different strategies.
But if you’re taking a long term approach, it’s important to keep the long term picture in mind.
Day-to-day ups and downs in the markets are normal and while past performance doesn’t guarantee future results, the stock market has historically always recovered and reach new all-time highs.
Here’s a visual comparison of the stock market over the last 38 years:
Not so scary, right?
Remember your why & reevaluate risk tolerance
Making emotional decisions based on short term performance is a perfect recipe for losing money in the stock market. When you invest money, you should have a reason for it.
For example, the most common financial goal is saving for retirement - if you’re young and saving for retirement, you have decades before that money needs to be accessed.
Seeing the market drop in value is stressful, but remember why that money is invested and keep in mind that it still has many, many more years to recover and grow.
However, if seeing your investments lose value is too much to handle - you may need to reevaluate your risk tolerance and begin investing in less risky, more stable assets.
Be properly allocated
Depending on the type of investor you are, you may or may not need to reposition much of your investment portfolio. If you take a more passive approach and invest in a broad range of index funds, you most likely don’t need to make too many adjustments and can ride out the volatility.
If you’re a more active investor, you may want to consider reallocating and prioritizing less risky diversification until you’re comfortable with the market conditions. Then at that time, you can reevaluate and get back into your desired positions.
Different industries and different types of investments perform in different ways during a market downturn, so it’s important to make adjustments in your portfolio where necessary.
Talk to someone
If you see your investment account value cut in half, it can be a lot to take in. Talking with someone can help you avoid falling victim to short-term, emotional decision-making.
We’ve had one of the most successful decades in stock market history over the past 10 years and it can be tough to manage investments when the market flips and isn’t doing so well.
If you’re not comfortable with making investments and managing money in less-than-ideal market conditions, it may be time to consider working with a financial planner. They can be a voice of reason and soothe some of the stresses that come with investing and money management.
Having a second set of eyes review impactful financial decisions is usually never a bad idea.
And if you’re someone who doesn’t have money in the market when it drops in value or aiming to invest more, it can present a good buying opportunity if you’re in the position to do so.
But overall, it’s important to stay the course.
Stick with your investment plan, don’t make emotional, knee-jerk decisions, and remember that investing is a long term game.
And if you find yourself worried about your investments, here’s a quick checklist created by Certified Digital with some questions to ask yourself during scary market conditions:
Originally published as the 37th edition of Financial IQ, a weekly newsletter that makes money make sense
Disclaimer: Topics or securities discussed in this email are not considered to be financial advice. Please talk to your financial advisor about specific advice regarding your situation.