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Updated on Thursday, January 10, 2019
You’ve likely heard that investing your money in the stock market isn’t just a good idea — it’s an essential step toward ensuring your retirement. The magic of compound interest, when combined with a substantial length of time, can transform even modest savings into an impressive nest egg.
But as tempting as those returns are, investing can be scary. Even the “safest” assets, such as bonds, are vulnerable to market fluctuations, and we all know what happened in 1929 (and 2008, for that matter). Big stock market crashes can make it seem like a better bet to take your hard-earned cash and stick it under your mattress.
Plus, it seems like there’s always a worrisome headline or two to strike fear into the heart of even the most steadfast investor. Most recently, talk of a 2019 recession has been circulating throughout the news media, and it’s true that the market has been in bearish territory as of late. But before you liquidate your assets and stash all your money under your bed, review these best practices for when the market takes a tumble.
Is the stock market going to crash?
Every year, all sorts of financial institutions (including MagnifyMoney) try to forecast the stock market’s future performance. The market’s volatility in 2018 and poor fourth-quarter performance mean tensions have been high among economists, but not everyone thinks a major crash is on the way in 2019.
For instance, Forbes contributor and author Bill Conerly suggested that improving household finances, high levels of capital holdings at banks and businesses, and a relatively stable housing market all suggest a crash is unlikely — though other factors, such as increasing federal interest rates, could trigger a recession.
Malik S. Lee, certified financial planner and founder of Felton & Peel Wealth Management, agreed. “Bull markets typically end because of the Fed increasing the rates,” he said.
It’s certainly true that some experts are downright pessimistic about 2019’s potential. The end of 2018 was rocky, and with the ongoing trade war with China, “it could get more frightening before it gets better,” said James Paulsen, chief investment strategist at the research firm Leuthold Group, in an interview with The New York Times.
But others suspect that whatever fall we might see in the beginning of the year is sure to correct itself in due time. “I can’t imagine at some time next year we won’t be up … 10 or 15 percent on the year,” said Tudor Investment founder Paul Tudor Jones when questioned by CNBC.
5 savvy things to do when the stock market declines (or even crashes)
Whether 2019 will bring a major market slowdown remains to be seen. But regardless of whether we’re on the verge of a crash today, the market will continue to fluctuate forever — which means, yes, there occasionally will be slumps. That’s just the nature of the market.
So instead of giving in to the temptation to sell, sell, sell, here’s what you should do when that bear market rears its toothy head.
1. Keep your emotions in check
We get it: Your money is your time, and the money you’ve invested is your security. It’s easy to see why emotions run high when your nest egg is at risk.
But it’s important to remember that the stock market is all about the long game. And even though things seem scary right now, performance dips eventually will correct themselves.
Lee is cautiously optimistic about the market’s current trials and tribulations — exactly because these fluctuations are normal.
“A market correction is healthy,” Lee said. “This is what it’s supposed to be doing.” Financial professionals expect (and plan) to see a number of pullbacks and, yes, even occasional recessions; that’s how the system works.
It may be easier said than done to keep that in mind when you see a scary headline, of course. But take a few deep breaths and remember that it’s only temporary.
2. Leave your money in the market
Pulling your money out of a bear market might seem like a no-brainer. After all, if you leave it in, you’ll lose even more, right?
Well, maybe. But you’ll also miss out on the restorative power of compound interest, which is pretty much your only realistic chance to recoup your losses, said Lee. He offered the following example.
If you have $100,000 invested and you lose 50%, that leaves you with $50,000. But earning 50% back will get you to just $75,000. You need a growth factor of 100% to get back to breaking even.
The thing is, it’s pretty much impossible to accrue that much growth without keeping your money in the stock market. Few other interest-earning accounts can achieve that level of remuneration.
Considering the average savings account pays around 0.1% interest, it could take you several lifetimes to make up the difference if you don’t reinvest your funds. If you want that lost chunk of change to reappear, leaving your money where it is and waiting for the inevitable rebound likely is your best option.
3. Consider buying more assets rather than selling existing ones off
An underperforming market actually can be good news for buyers. You have an opportunity to get yourself some hot assets while the getting’s good!
During a slump, even stocks at very valuable companies might be offered at low prices. Buying at the low end of the market gives you more room to grow when the market recovers.
4. Make sure your investments are diversified before the worst happens
Diversification can help you weather market declines. While everything might perform slightly worse, chances are you won’t lose the entirety of your assets if you keep your eggs in multiple baskets.
That’s why it’s important to invest in a variety of different types of securities across a range of risk-reward ratios. If you’re worried about a looming market crash, review your portfolio now and ensure it’s balanced in a way that makes sense for your situation — which leads us to our final point.
5. Get serious about planning
Think about the last time you had to speak in front of a crowd. How grateful were you for your notecards? And how lost would you have felt if you’d suddenly lost them or been called up to speak without any preparation at all?
Most of us feel a whole lot more comfortable in the face of stress if we go in with a plan of action. The same is true of finances, especially when it comes to investing.
Whether you sit down on your own with a pen and piece of paper or hire a professional advisor, creating a long-term monetary plan (and saving up an emergency fund) can make scary stock headlines a lot more palatable. It also can keep you from making the mistake of cashing out your investments early.
“If you know you have five to seven years’ worth of cash reserves, you know you can withstand [a slump] and wait for the market to turn back around,” Lee said. After all, it’s a lot scarier to leave your money where it is if all of it is tied up in the market.
To get ahead of that problem, look at your future cash flow needs earlier rather than later. That way, you’ll have a better picture of your overall timeline — and enough savings to float through lean periods.
“Planning is the key to keeping your emotions in check,” Lee said. (Psst! Thinking of hiring a financial adviser of your own? Be sure to ask these 10 questions.)