Your best financial friend
Handle a Decline
When The Market Declines
The market will go down. You will feel like you are losing money. But it is important to remember that you do not actually lose money until you sell your investments. When the value of your investments goes down, it is called a "paper loss". You still own the same number of shares, they just have a lower value. When the stock market recovers, the shares will regain their value.
When you sell the investment at a loss, it becomes a "real loss". You no longer own those shares, so when the market recovers, you will not participate in the recovery. So do not sell your investments when the market crashes and you will not lose money.
A market correction is a term for when the market declines more than 10%, but less than 20%, and usually lasts around 3-4 months. A bear market is when the market declines at least 20%, and often lasts just over 9 months. A bull market, conversely, is when the market goes up at least 20%. The stock market goes up 70% of the time. However, corrections occur frequently and are a normal part of the stock market and occur about once every 2 years.
As you can see, you will frequently experience these cycles, but you should not react to them by selling your investments. A market correction is an opportunity for you to buy your investments at a discount. Think of it as a sale.
A market correction also offers an important opportunity to evaluate your risk tolerance. You may think you have a high risk tolerance, but a market correction may reveal that you do not. When there is a correction, take a moment to reflect on how you are feeling. Do you feel a manageable level of anxiety or are you having trouble sleeping? Do you check your balances obsessively?
If simply being intentional about ignoring your balance resolves your stress, then you are probably investing at an appropriate risk level. However, if you find that you cannot stop worrying about your investment balance, then you may need to adjust your portfolio to a more conservative allocation. If you can, wait until the market has recovered to make any changes so you do not lock in any losses. Review your personal investment policy statement and adjust your strategy to align with your risk tolerance.
Dollar Cost Averaging
One way to handle market volatility is to consistently contribute to your retirement accounts, which allows you to dollar-cost average. Dollar-cost averaging is the practice of consistently contributing to an account regardless of price to average out the dips and increases in stock prices. This practice keeps you from timing the market, which often delays you from investing because you are waiting for the perfect price drop.
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If you receive a windfall or inheritance, you can put all of the money in at one time because the market is likely to continue increasing. However, if you are worried about putting all of your money in and experiencing a market correction right after, dollar-cost averaging reduces that risk.
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Next, let's take a look at balancing investing and paying off debt.