What to Do When Markets Plunge
Play it cool with these five tips.
This January proved to be the worst start to the year for U.S. stocks, with most indexes losing money during the month. And, while the market has moved upwards, the recent correction raises a common concern for many investors: What do I do when markets plunge?
While I don't recommend attempting to guess where the market is going, it's important to have a well thought out game plan should things get ugly. Having a plan will help alleviate stress and enable you to stay committed for the long-term.
Below are my five tips for keeping it cool when markets fall.
Sign up for Kiplinger’s Free E-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.
1. Buy More
If your time horizon and risk profile allow for it, a drop in prices could be viewed as an opportunity to add to your investment. As Warren Buffett once said, "Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down." Could prices keep falling? Absolutely. If the prospect of prices falling further scares you, consider implementing a dollar cost averaging strategy. Pick a dollar amount and a time period, and make regular contributions to an investment. For example, you might commit to investing $100 on the fifteenth of each month for six months.
The key is to commit to the strategy and not be influenced by where you think things might be going and change your plan mid-cycle. To help lower the temptation, consider automating the process with the help of your financial adviser or custodian.
2. The More You Read, The More You Will Know
I'm not suggesting following daily headlines; instead, educate yourself with books from well-respected authors who can help you become a smarter investor. In my experience, anxiety about money and investing can often be reduced through education. If you're looking for a place to start, I recommend The Behavior Gap by Carl Richards. It's an easy, informative read, great for new or experienced investors and even financial professionals.
3. Do Nothing
During volatile periods, investors often feel inclined to make changes to their portfolios. Taking action gives people the perception of control—even if those actions do not generate positive results. Even though doing nothing during a turbulent time is extremely difficult, it can actually be better than doing something. Don't lose sight of your long-term goals—be patient and do nothing.
4. No News is Good News
While it's important to stay informed, the more you update yourself on market fluctuations, the more volatile it will appear. Remember—no one truly knows what will happen next, nor does your media outlet have insight to your personal financial situation or your goals. Turn off the news (broadcast, online, social media, etc.) and disconnect from the frenzy, at least temporarily.
5. Reassess Your Risk Tolerance
Recent events are a good reminder that markets don't always go up. Use this time to reflect on your behavior over the last couple of months and reassess your tolerance for risk. Were you worried? Did you panic? Did you lose sleep? Perhaps your portfolio is not positioned appropriately. If it is not in line with your tolerance for risk, you might have a harder time holding on during times like these.
Regardless of how you feel when markets plunge, remember you can't predict or control the markets. Have a strategy in place that helps mitigate your risk (and lower your stress levels) and stay focused and committed to your long-term goals.
Taylor Schulte, CFP® is founder and CEO of Define Financial, a San Diego-based fee-only firm. He is passionate about helping clients accumulate wealth and plan for retirement.
Taylor Schulte, CFP®, is founder and CEO of Define Financial, a fee-only wealth management firm in San Diego. In addition, Schulte hosts The Stay Wealthy Retirement Podcast, teaching people how to reduce taxes, invest smarter, and make work optional. He has been recognized as a top 40 Under 40 adviser by InvestmentNews and one of the top 100 most influential advisers by Investopedia.
-
Stock Market Today: S&P 500, Dow Extend Losing Streaks
Reddit stock continued to charge higher and has now nearly doubled in price since last week's IPO.
By Karee Venema Published
-
Costco Will Limit Access to $1.50 Hotdogs
After April 7, you must be a Costco member to buy the $1.50 hot dog soda combo.
By Donna LeValley Published
-
Four Things to Know About Managing a Loved One’s Finances
Figuring out when it’s time and knowing how to talk about it are just the start. You also need info about estate plans, insurance and health care decisions.
By Tony Drake, CFP®, Investment Advisor Representative Published
-
Three Tax-Smart Strategies for Real Estate Investing
Opportunity zones, Delaware statutory trusts and real estate income funds can help investors maximize gains and mitigate taxes.
By Dwight Kay Published
-
Can Language Apps Teach You to Speak a Foreign Language?
Your expectations might be too high if you think an online language platform can teach you to have a meaningful conversation in a foreign language.
By H. Dennis Beaver, Esq. Published
-
Avoid Surprises: Don’t Procrastinate on Your Taxes
You really should start thinking about next year’s taxes immediately after filing this year’s. Better tax efficiency could save you some serious dough.
By Jared Elson, Investment Adviser Published
-
How Gig Workers Can Prepare Their Estate and Financial Plans
Freelancers have to be vigilant to keep track of where their money goes, whether it’s to cover daily necessities, saving for retirement or other expenses.
By David Handler, J.D. Published
-
When Flying Toward Retirement, Secure Your Own Mask First
Parents often feel compelled to help their kids pay for college, but when that could result in you moving in with them later, you should put your savings first.
By Andrew Rosen, CFP®, CEP Published
-
Nine Personal Finance Podcasts Worth Checking Out
Business professionals give shout-outs to favorite podcasts aimed at helping listeners improve their financial literacy and manage their money responsibly.
By Anthony Martin Published
-
Before You Claim Social Security, What’s Your Income Plan?
If you’ll have multiple income streams in retirement, you’ll need to coordinate everything so you don’t end up paying taxes on your Social Security benefits.
By Nick Stahl Published