It’s easy to be on board with investing when the market is up, right? You check your portfolio, see that your funds have grown, sweet!
But when the market dips…well, that’s another story. You can start to second-guess every market move you’ve made, no matter how well thought out they were initially. In those cases, even the most experienced investor might start to feel a little jittery. And we get it. It’s not fun to see your investment accounts – and by extension, much of your hard-earned money – shrink in a matter of hours (or minutes!).
Yet it’s one of the obvious-but-still-hard-to-swallow truths of investing in the stock market: sometimes things can get a little hairy. Stock prices can fall. You might spin in circles about whether you have to sell. We’ve likely all been there.
That’s why it can be a good idea to keep reminding ourselves (yes, sometimes over and over) about some of the tough situations that the stock market can bring about. Whether you’re a new investor or an old hand who has seen some stuff on the markets, stick with us for a refresher on some of the challenges investors face and how you can weather through them with your sanity intact.
Whether you’ve been a stock market investor for years or are just getting started, you’re probably aware that the market goes up and down. And it’s not always in a way you can predict. This information certainly isn’t rocket science but stay with us.
Now you long-time investors know this well but it’s still worth reiterating: investing is all about risk and reward. Markets may deliver potentially higher returns on riskier assets, like stocks versus bonds or low-risk alternatives such as cash held in deposit accounts.
And that may be part of the reason you’ve added stocks to your portfolio mix: maybe you want to score some of those potentially bigger earnings! Now, there are no guarantees that it will pan out that way, but that’s just what’s been historically typical of the stock market.
Another truth: The prices of stocks typically bounce around much more than the prices of bonds. So if you have a stock-heavy portfolio, it can be a good idea to brace yourself for a bit more volatility.
We know it never feels good to see your portfolio balance drop when stock prices fall. After all, that’s kind of the opposite of what we’re trying to do here.
But if you’re in the market to buy, shrinking prices could have an upside. Think about the times you’ve scored a lower price on something, like a car or that couch that you’ve had your eye on. Getting a deal feels good!
Now, something similar happens to investments every so often. Conventional wisdom tells us that buyers may benefit from lower stock prices, since they can purchase more stocks with the same amount of cash. The idea is that if/when those prices go up, you could potentially earn some nice returns.
Of course, there’s always the potential for prices to drop further. Just as you wouldn't shop for a new refrigerator every time there's a deal, you wouldn't necessarily shop for stocks every time prices go down. Your money goals and investment strategy would likely play a role in that decision. (And a financial advisor can help you decide what to go for if you’re unsure.)
OK, we know this isn’t an easy one! Investors, from novices to pros, can be led astray by their emotions (something you may have personally experienced already).
When the stock market has been climbing for years, it’s easy to get overly enthusiastic and to dismiss potential risks. Just let those investments coast! On the other hand, it’s equally easy to become fearful and to sell in a panic when prices fall.
Again – we’ve probably all felt these emotions at one time, whether we acted on them or not. We’re only human after all!
But emotions and investing don’t mix well. (We like to think they’ve got a bit of an oil and water relationship.)
Fortunately, emotions don’t have to be in charge of your money decisions. One helpful strategy to help keep feelings-driven decisions at bay is to consider your risk tolerance. That’s your willingness to take risk — along with your financial ability to take losses — when you’re deciding how much of your portfolio to invest in stocks.
Let’s say you find a period of market turbulence makes you extremely uncomfortable. If you decide that you’re not truly willing to take as much risk as you had thought, you might decide to trim down your stocks and include more bonds in your mix. Now, your risk tolerance is only one part of the puzzle – your time horizon, money goals, and portfolio size could help you decide the percentage of stocks you want to own, too.
And like we mentioned before, if you remember (and remind yourself!) that investing will be stressful sometimes, that can help you stay the course when stock prices tumble.
When markets are uncertain (or full-on frightening), you might be unsure about continuing to put money into your investment accounts. You might even be tempted to pull out of the market altogether. On top of this, it might also feel harder to stick with an investment strategy you’ve previously decided on.
One thing that can help you feel a little more secure during uncertain times is something you’re probably familiar with: diversification.
So when one type of asset takes a hit (say your stocks go down), the other parts of your portfolio can help offset some of the loss. Now, diversification won’t protect you against every loss, but it can help to minimize them.
Another idea that can help keep you on track during market ups and downs is auto-contributions. If you have a 401(k) or IRA, you might already be doing this, but you can set up a regular-ish buying schedule with other investment accounts, too.
The reason why they help: you’re not worried about beating the market. Instead you’re making contributions on a regular basis, regardless of what’s happening on the trading floor. Auto-contributions can help you stay the course and take some of the guesswork and emotion out of investing. And less stress is what we’re going for here.
Finally, rebalancing your portfolio can help you stick to your original investment strategy and target allocation, even if the market puts your portfolio a little out of whack. Rebalancing is a process in which an investment adviser or fund manager (or you if you manage your own portfolio) might periodically reset the mix of stocks, bonds and other holdings in a portfolio so they’re aligned with your long-term target.
For example, in the case where stock prices fall and bonds have held steady, rebalancing may mean shifting some dollars from bonds into stocks. Now rebalancing isn’t something you do every time the market drops. Rather, whenever your portfolio starts to drift a little too far from your target allocation, rebalancing allows you to bring it back in line with your ideal investment strategy.
When it comes to investing, remember – we’re all in this together. When the market drops, it drops for everyone. So remind yourself (because we all need a reminder sometimes) that ups and downs are normal. And when it comes to investing in the stock market, it helps to be realistic.
Not letting our emotions get the best of us is key. And we know that’s not always easy! But hopefully staying calm and understanding the right investment strategy for you can help you ride out the waves.
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