As stock prices continue to fall, it’s not an easy time to be an investor. the S&P500 is well into correction territory and is approaching a bear market. If you have money tied up in the stock market, this slowdown can be hard to bear.
Although no one knows how long this downturn will last, the market will eventually recover. Market corrections and even crashes are normal, and it’s only a matter of time before stock prices rebound.
In the meantime, however, there are a few things you can do to keep your money as safe as possible.
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1. Boost your emergency fund
Market declines are among the worst times to sell your investments. Stock prices are at rock bottom, and if you take your money out during a downturn, you’ll likely end up selling your investments for less than you paid.
For this reason, it’s a good idea to have at least a few months of savings in an emergency fund. That way, if you face an unexpected expense during a market downturn, you can afford to cover it without having to dip into your investments.
2. Make sure you’re diverse
A well-diversified portfolio can give your investments a much better chance of recovering from a downturn. Not all stocks will survive periods of volatility, and if all your eggs are in one basket, so to speak, you stand to lose a lot of money if your investment doesn’t rebound.
While there is no hard and fast rule as to how many stocks you should own, a general rule is to make sure your portfolio contains at least 25-30 stocks from a variety of industries. This will provide you with more downside protection, because if one or two of your stocks are not performing well, your overall portfolio won’t be hit as hard.
3. Check your asset allocation
Asset allocation refers to how much of your portfolio is allocated to stocks versus bonds, and it’s especially important for those approaching retirement age.
When you’re young and still have many years to go before you plan to retire, you can afford to invest more aggressively in stocks. Even if your portfolio takes a hit during a downturn, there’s plenty of time to let it recover before you need that money.
However, as you age, your portfolio should gradually become more conservative. Bonds and other conservative investments often have significantly lower returns than stocks, but they are also less affected by market volatility. If you’re nearing retirement, shifting your portfolio more toward bonds can keep your investments safe when you need them most.
4. Review your investments
The investments you choose will determine your fate during a market downturn. Risky stocks of fragile companies can sometimes perform well when the market is booming, but they are also more likely to crash and burn during periods of volatility.
The best investments are therefore those in solid companies with strong underlying business fundamentals. The healthier the organization as a whole, the better its chances of surviving a market downturn.
These types of stocks may not generate explosive returns in the short term, but investing is a long-term strategy. When you choose your investments based on the overall strength of the business, you are much more likely to achieve positive long-term average returns despite volatility.
Market downturns are tough and it’s normal to be nervous about the future. But they won’t last forever and the market will eventually recover. By taking a few steps to prepare now, you can worry less knowing your money is as safe as possible.
