Economic downturns are inevitable in the landscape of investing. While the very idea of a market crash is worrisome for even the savviest of investors, the fact of the matter is, it’s the fear of the crash that will do more harm to your portfolio than the crash itself.
The best way to survive during a market downturn is to educate yourself on good investing habits. Building a solid portfolio that can withstand the lows will eventually pay out for the better in the long run. The stock market doesn't run on a predictable rate of return. While there is no such thing as realistically avoiding market downturns if you’re an investor, here are some tips to ensure that your investments remain stable.
Look at Your Asset Allocation
Stocks are a key component of any portfolio for investors to stay ahead of inflation. If we do not invest to stay ahead of inflation, in the future we will not be able to afford the goods and services we can buy today. Unfortunately, stocks do not move up in a straight line, and at times the roller coaster ride can cause the investor undue stress. It is wise to keep the money you need for the next one to three years in a very safe investment vehicle, like bonds, that will not be affected by the ups and downs of the stock market. Asset allocation is an investment technique that spreads dollars across multiple asset categories, such as stocks and cash alternatives. Using this strategy can give investors the peace of mind they need to stay focused on their goals and not make irrational changes in their investments.
Consider Dividend-Paying Stocks
If the ups and downs of the financial markets are unsettling for you, yet you know you need to own stocks to meet your financial goals, consider dividend-paying stocks. While the prices of these companies still fluctuate, management will reward shareholders in the form of quarterly cash payments that investors can use to buy back more of the company’s stock at lower prices, or use to supplement their income. These types of companies can benefit investors in both up and down markets. Visit CAIM to learn how dividend-paying stocks can be rewarding in any market.
Learn How to Filter the Hype
Turn off the media! During a market downturn, headlines can make even the smartest investor feel like the financial world is coming to an end. Keep in mind, it is the goal of the press to keep people reading and watching. Oftentimes, the media will exaggerate the news to keep listeners and readers hooked, mostly to cause a stir. This can lead to unwise investment decisions that are not for our long-term best interests. If you are having difficulty understanding what is going on in the current climate, it is best to call your financial advisor and get a more balanced explanation of what is happening. Remember, haste makes waste.
There is no perfect time to get in or out of a market. Remember, your investments that are cumulative are the ones that reap the most benefits. The best you can do is accept risk and make wise investment choices that work for you and your long-term goals. With the right investments, anything extra you can save now will produce substantially more for you when you need it, no matter the economic climate.
Catherine Avery is a member of the DailyWorth Connect program. Read more about the program here.