Courtesy Hanna Horvath
- Watching your stock portfolio plummet can be scary, but don’t panic during bear markets.
- The best thing to do is nothing and stick to your long-term plan, since the market will go back up.
- You can also rebalance, buy defensive stock, or do dollar-cost averaging instead of making drastic moves.
- Read more from Personal Finance Insider.
What goes up can sometimes go down. The last few months have been a reminder that the stock market can turn extremely volatile. All the major indices — the Dow, S&P 500, and Nasdaq — had declines of 10% or more in the past month, falling into correction territory. The tech-heavy Nasdaq slipped into a bear market, down more than 20% from its record high in November. Some experts say there’s a good chance the S&P 500 will follow suit.
This type of news can make even the most seasoned investor nervous. As a certified financial planner, I often get questions from friends and family about what to do when the stock market turns into a roller coaster.
My response? Do nothing.
Well, that’s the short answer. The longer answer is: If you built a resilient investing plan from the beginning, you shouldn’t need to make any adjustments to weather any storms.
But what if you want to take action? Instead of making an impulse decision that could hurt your finances even more, here’s what you should do.
1. Get an emotional gut check
I get it, watching last year’s investment gains get erased is definitely frightening. The big challenge with investing is often managing our own emotions and biases. However, it’s important to take a second and think practically before you act — and remember that ups and downs are part of any long-term investing plan. In fact, what we’re experiencing right now has happened before.
Bear markets, also know as when prices drop 20% or more from their recent highs, are normal. There have been 26 bear markets in the S&P 500 Index since 1928. However, there have also been 27 bull markets — and stocks have risen significantly over the long term.
One of the best things you can do for your investments right now is to avoid panicking, which is easier said than done. Whenever I feel overwhelmed from bad news in the market, I take a step back and get re-organized with my financial plan.
While it won’t change the outcome of the S&P 500, it can give you a sense of control and help you feel more confident moving forward.
2. Revisit and rebalance your investments
A common financial planner piece of wisdom is: “Focus on what you can control, and diversify what you can’t control.”
Having a diversified portfolio can help you weather any storm and having a mixture of different assets will help you minimize your losses during a volatile market.
Make sure you have a balance of high-to-low risk investments. An example of this could be mixing higher-risk individual stocks with lower-risk bonds. This will give you some security against ups and downs.
Knowing what percentage of your portfolio to invest in stocks versus bonds is based on your risk tolerance and financial goals.
If you aren’t planning on needing the money anytime soon and are willing to take on more risk, you can shift your portfolio to contain more stocks. But, if you are saving for something specific or are nearing a goal like retirement, consider switching your portfolio to safer investments with a lower rate of return — like bonds or certificates of deposit.
3. Embrace dollar-cost averaging
Another investing strategy I recommend is dollar-cost averaging, where you invest equal dollar amounts on a regular basis over time (for example, $250 a month).
Over time, this strategy leads you to buy fewer shares when stocks are expensive and more when stocks are cheaper. You’ll typically end up paying a lower average price per share over time. It’s a practical strategy that removes a lot of the emotion from investing.
The last thing you should be doing right now is trying to time the market. It’s easy to get wrapped up in the headlines and think we know the right time to buy or sell a stock. But trying to time the market often backfires, and you can end up buying or selling at the wrong time.
When stocks drop, investors get nervous and sell. They’ll miss out on potential gains when the market goes back up. On the other hand, an investor could see the stock market going up and rush to buy, only for the stock to start to drop the next day.
4. Go on the defensive
Another way to bolster your portfolio is by adding “defensive” stocks that will offer a steady return regardless of what’s happening in the economy. This includes bonds, like I mentioned before, but also dividend-paying stocks.
There are also some sectors, like consumer staples and utilities, that perform well when everything else is falling. You can invest in these industries either through index funds or exchange-traded funds — both offer an added layer of diversity by investing in multiple companies in that industry.
Ever heard of the phrase “buy the dip”? During a roller coaster stock market, there are plenty of recently-fallen stocks that are expected to quickly recover in the next few months. If you are wary of investing in individual stocks, there are some mutual funds that invest specifically in undervalued companies, like Fidelity’s Contrafund.
Dealing with market swings is easier said than done — trust me, it doesn’t feel great to check your investments and see them in the red. But doubling down on your plan and focusing on the long-term is one of the best things you can do for your money.
It’s likely you won’t have to wait too long for the market to recover. And when it does, you’ll be happy that you stuck to your plan.
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