What do you do when the market gets “sick”?

Whether you have been directly impacted, or just heard about it on the news, I’m sure you know what’s going on. The stock market is down and people are panicking. 

A current look at your investment accounts may spark the same initial reaction. 

Maybe you’re asking some of these questions.

What happened to my money? 

Will my accounts bounce back to where they were? 

Who convinced me this stock market thing was a good idea anyway? 

You’re not alone. The unknown nature of the stock market can incite fear in even the most seasoned investor. However, when volatility strikes, it’s important to walk through these 5 steps before making any decisions with your money. 

1. DON’T PANIC

If you’ve done any of your own research on the market, you’ve heard this phrase over and over. Even so, it’s worth reminding yourself that no good decision is made in a state of panic or fear. 

Take a step back from the situation and try to think about things rationally. Big swings in the market are almost always caused by people selling impulsively, and not by fundamental changes in the economy. 

Remember that once you’ve sold out of the market, you have “locked-in” whatever gain or loss that you had. If you sell while the market is down, you will miss the potential upswing once the uncertainty has blown over.

2. Remember Your Plan

This step starts before the volatility happens, and acts as a guide for every financial decision that you make. Investing in the market is a great tool to help you build future wealth, but should not be done without having a plan from the very beginning. 

Whether you’re a seasoned investor or just starting to scrape together an emergency fund, you need a financial plan. 

Your plan doesn’t have to be complicated, but it should include 

• Your reason for saving or investing
• The amount you need to save to reach your goals
• Your timeline for reaching your goals
• How much risk you are comfortable taking along the way

This plan will act as a compass for every decision you make. 

If you’re saving for a goal that’s 20 years away, like your retirement, then it probably makes sense to weather the turbulence and make sure your money is in the market when it recovers. 

3. Follow The 5-Year Rule

This step is relatively simple. In order to make sure that you never get caught off-guard by a down market, we strongly encourage everyone to incorporate the 5-year rule into their financial plan.

This rule states that you should only invest money that you don’t plan to use for 5 years. Any cash that will be used in the next 5 years should be placed in a money market or high-yield savings account. 

History has shown us that after a substantial market decline, the average recovery takes less than five years. Following the 5-year rule will allow you to have peace of mind knowing the money you need to fund your near-term goals will be available in cash, regardless of what the market does. 

4. Look Back at History

Below is a chart showing the 91-year history of the U.S. stock market, with returns shown for large companies, small companies, government bonds, and treasury bills. As you can see, over a period that has included wars, disease, depressions, and recessions, the market has trended positive in the long run. 

Compound annual returns for the market since 1926

Small Companies – 11.8%

Large Companies – 10.0%

Government Bonds – 5.5%

Treasury Bills – 3.3%

Think about it this way. When you invest in the market, you are technically buying fractional parts of the companies whose stock you purchase. If the market is down 25%, ask yourself this question: Are these companies actually worth 25% less than they were at the top of the market? 

The answer is probably no, and the big banks and traders know that too. History has shown us that once the fear blows over and the smoke clears, shares get quickly bought up at a “discount” and values eventually rebound. 

Note: It’s important to note that some companies get hit much harder than others in difficult economic times, and some never recover. This is why it’s important to spread your investments over many companies in various asset categories, to protect yourself from the risk of being heavily invested in one failed company. One easy way to do this is to use multiple mutual funds or ETFs in various asset classes. 

 

5. Think About Investing Extra Cash

After you’ve taken a step back and decided not to panic sell, think about your financial plan and the historical information above. Do you have extra cash sitting on the sidelines that you don’t plan to use for a near-term goal? It may make sense to put some of that money into the market at a “discount”. 

Keep in mind that not all investments are created equal, and you should be very careful about how you choose to invest your money. Make sure you are well-diversified and have a long-term time horizon, knowing that you could still see some short-term losses. If you do those things, investing in a down market can be one of the best strategies for future growth. 

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