It’s been a long time since we ended a year with U.S. stock market being down. However, the longest bull market in U.S. history, which started on March 9, 2009, could finally be coming to an end.
If you have watched or read any amount of news recently, you haven’t been able to avoid the roller-coaster headlines over the last two months like, “Dow tumbles nearly 600 points” followed by, “Here's why the stock market was up today, extending a rebound.”
We are in a cycle of volatility, and it has many investors holding their breaths. Despite the bumpy ride the stock market has been on recently, remember that volatility is normal. As you continue to watch the headlines (and your portfolio balances), here are a few things you will want to do (and not do) when the market drops.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
What to Do When the Market Drops
Take a Breath
This is not to sound condescending. I know how difficult it can be to watch your portfolio lose thousands of dollars when the market takes a dive. You have to turn off the TV and stop scrolling through the headlines on your phone. There is nothing unusual about the market activity we’ve been seeing, despite the doom and gloom fed to you by pundits in the financial news media. Keep in mind, the media is motivated by ratings and clicks, and the worse they can make a story sound, the better it is for their bottom line.
In reality, the economic cycle is the natural fluctuation of the economy between periods of expansion (growth) and contraction (recession). Depending on which part of the cycle we are in, the stocks will be either rising or falling. There is no in-between. Now, the catch is that no one knows how long these cycles will last. If we did, investing would be a whole lot easier!
Still Saving for Retirement? Buy More Stocks via Dollar Cost Averaging
One of my favorite sayings, although I don’t know who said it, is that stocks are the only thing that people don’t want to buy when they are on sale.
Emotionally, buying into a market that is dropping is very hard to do. Don’t forget, though, that you want to buy stocks at a lower price and sell them at a higher price. When the market drops, you are able to buy stocks at a cheaper price. This is a good thing!
So, how do you ensure we are buying at the correct time? Well, there are no guarantees, but you can smooth out the bumps with a method called Dollar Cost Averaging. Dollar Cost Averaging is the practice of regularly investing a fixed amount of money regardless of market activity. This strategy lowers the average cost per share of an investment and eliminates the risk of a single investment at the wrong time.
In other words, take emotion out of investing and buy stocks on an automated schedule (same day and amount each month) to avoid any attempt to time the market. This way, your average price per share will even out over the long-term. It is the best way to avoid gambling with your future.
Already Retired? Cut Back on Your Drawdowns
If you are retired and drawing down on your portfolio, look to lower the amount of your distribution for a few months. Your original drawdown assumptions were likely made on a higher amount of assets. Lowering these distributions for a few months will allow you to reassess and make any necessary adjustments so that you can protect your retirement income.
What Not to Do When the Market Drops
Take Your Money Out of the Market
The one thing you definitely DON’T want to do when the market drops is to take your money out of the market! Resist the reflex to panic.
If you have heard it once, you have heard it a thousand times: No one, and I mean NO ONE, knows where the market is headed. You cannot time the ups and the downs. It might “feel” safer to get out now, but when do you get back in? You, in essence, could wind up making the worst investment move of selling low and buying high. Don’t do it.
When you are properly invested in a diversified portfolio that is designed with your goals in mind, according to your risk tolerance and capacity for risk, you shouldn’t pay attention to what the market does this month or that month. Your long-term investing strategy should already be accounting for such normal market fluctuations.
Conclusion
Whenever you look to make a drastic change to your portfolio, ask yourself: “Have my goals changed?” If the answer is no, chances are you should stay the course. If the answer is yes, it’s a good time to reconnect with your financial adviser and discuss potential updates to your long-term investment strategy. Your long-term financial success isn’t determined by one trading cycle.
-
10 Cities Where Grocery Prices Are HighestThese 10 cities are paying up to 33% more than the rest of the country to keep food on the table.
-
Amid Mounting Uncertainty: Five Forecasts About AIThe Kiplinger Letter With the risk of overspending on AI data centers hotly debated, here are some forecasts about AI that we can make with some confidence.
-
Here's How to Plan This Year's Roth Conversion, From a Wealth ManagerWhile time is running out to make Roth conversions before the end of the taxable year, consider taking your time and developing a long-term strategy.
-
Four Times You Need a Second Opinion on Your Financial PlanIs your financial plan fit for purpose — or is your adviser peddling an outdated strategy? When you see these red flags, it's time for a second opinion.Evan
-
'But It's Not My Fault!': Your Insurance Company Absolutely Will Blame You in These Five ScenariosInsurance companies care about 'fault' in more ways than you think — from payment mishaps to your neighbor's landscaping — so it's on you to manage the risks.
-
Dow Dives 797 Points as Government Opens: Stock Market TodayThe process of pricing and re-pricing realities old and new never stops, and next week promises to be at least as exciting as this week.
-
How to Calm Your Retirement Nerves When It's Time to Shift from Savings Mode to Spending ModeTransitioning from saving to spending in retirement can be tricky, but devising a strategic plan can help ensure a smooth and worry-free retirement.
-
Why Wills and Trusts Aren't Enough in the Great Wealth Transfer, From an Attorney Who KnowsFamilies need to prepare heirs through communication and financial know-how, or all that money could end up causing confusion, conflict and costly mistakes.
-
Private Markets for Main Street: What Financial Advisers' Clients Need to KnowWith product innovation 'democratizing' private market access for everyday investors, advisers must step up their game to educate clients on the pros and cons.
-
Dow Climbs 327 Points, Crosses 48,000: Stock Market TodayMarkets are pricing the end of the longest government shutdown in history – and another solid set of quarterly earnings.
