Chances are you have not lived through a turbulence like that or you did not have much to lose when the market went south last time. The last 11 years has been the longest period of the bullish market but downturns are normal. On average, since the Great Depression, the markets have dipped every 6-7 years, losing on the largest dips as much as 50-80%. Yet markets rebound and deliver long-term gains.
- Stay the course. If you have a financial plan – stick to it. If you do not – do not panic and keep reading.
- Do not sell. It might be daunting to look at your investments losing value yet selling your stock position in the falling market will lock your losses. It is hard (if not impossible) to time the market and if you miss even a few days of market bouncing back, it will be hard to catch up.
- Have an emergency fund. If you have some spare money, it might be tempting to start buying hoping to catch the bottom of the market. Yet before you consider it, make sure you have a solid foundation to get you through at least several rough months. Depending on your risk tolerance and family situation, you should have at least the amount that could cover 3-6 months of you living expenses in liquid instruments. Some would prefer to have 6-12 months worth of living expenses – should they or their partner lose their jobs or have a medical emergency. Set these money aside in FDIC-insured deposit or a Money Market fund with a known financial broker.
- Invest consistently. If you have already your emergency fund, you can consider starting investing – buying stocks when things look grim can set you up for realizing big returns when markets rebound. Yet remember that timing the market is next to impossible and you do not know when the market is reaching it’s bottom. That’s when consistency comes into play. You can divide your money in 5-10 chunks and invest each roughly every 3-5 weeks. Chose an ETFs or an Index fund that has a low expense ratio and low (or zero) trading commissions so that you do not overpay.
- Take emotions out of equation. It is nerve-wracking to watch your investments losing value. Try not to look at your 401K, IRA, HSA or brokerage account balance every day (looking at it every week will not do you any good either). Your friends might be there for you during hard times yet chances are they will not have the best financial advice. If you keep in mind the first 4 steps, you are already in a good position.