When the stock market takes a sudden turn downward, it can be easy to get worried about your investments. Market turmoil can cause even seasoned investors to take pause. Watching the value of your investments go down can certainly be disheartening.
In fact, a 2018 study found that Americans are more stressed by money issues than by personal relationships or work. Stock market volatility is nothing new so finding the best way to cope with the swings will help give you peace of mind. Getting your finances in order will help you weather the inevitable ups and downs of your investment portfolio.
Rather than freaking out about the market’s roller-coaster ride, check out the steps below to get your finances in order and get on the path toward financial stability and peace of mind.
While your first inclination may be to panic when you see the value of your portfolio drop, don’t let powerful emotions take over common sense. When emotions are high, it can be easy to make rash decisions that you may later regret. Take a few deep breaths, turn off the TV, close out of the browser and go do something else.
Review your investment plan
According to a survey, only 40 percent of Americans are confident that their financial plan can withstand market cycles. That means that six in 10 Americans don’t have a clear idea of the future of their finances, which can lead to panic every time the market swings downward.
One of the best things you can do for your peace of mind is to put together a financial blueprint that helps you align your goals and priorities. It’s important to determine your financial goals and values before you draft a plan for investing your portfolio.
You can do this on your own or talk to a trusted financial planner who can guide you through the process and ensure you have a clear picture of your finances and next steps.
Should you increase contributions when the market goes down?
Some investors see a tumbling stock market as a good time to double down and increase contributions. While this may be a good strategy for some, it’s not always perfect for everyone. It really depends on your long-term financial goals and investment plan.
If you think this may be a good opportunity to invest more, have the available cash, and this aligns with your plan, this may be a good option. Whatever you do, don’t go into debt just to increase contributions during a downturn i.e. please don’t take out home equity to invest in the stock market.
Should you stop investing?
Stopping contributions to your investments such as a 401(k) plan should not be timed with market conditions. Even if the market is going down, stay the course and ignore the noise. There’s no reason to panic and make rash decisions that you may regret later.
Remember, what goes up can come down so a market correction is certain to occur numerous times over your lifetime. If you pull money out or stop making contributions when the market is down, you’ll be locking in your losses and potentially missing out on future gains.
Stay the course
When it comes to market correction, whatever you do, stay the course. What that means is following the investment plan you’ve drafted, which aligns with your long-term goals and values.
Don’t allow market fluctuations to have a major impact on your mental health and the health of your finances. Keep steady on the course you have outlined so you can meet your investment goals.
Talk to a Professional
If you don’t have an investment plan in place, it’s important that you sit down and assess your priorities. Without a clear picture, it can be easy to let market conditions dictate your state of mind. Don’t become a victim of poor planning, allowing your finances to take over your personal life and causing you to lose sleep.
It’s important to get an idea of where you stand and where you’re headed so you can make decisions accordingly. Not having long-term goals is similar to heading to a new location without a map.
Think about when you plan to use the money in your accounts – in a couple of years, in 10 years, or in 30 years? Your investment horizon is an important piece of the puzzle. Also, look at your current investments and see if they match up with your investment horizon.
This type of planning is best done with your partner if you have one. Since these decisions will affect both of you, it’s important to get their input and ensure you’re on the same page. Take some time to review your finances and determine your own priorities so you can draft an investment plan.
If this step seems intimidating or if you’d like some guidance, talk to a qualified financial planner who can help you figure out what to do next. The most important part is to get a clear picture of your finances and determine how you want to manage your money and your investments over the long term.
What to do instead
Instead of panicking at each twist and turn of the market, focus on those areas where you have the power to make a real difference. Once you have a clear picture of your finances, improving these areas will help you achieve your financial goals and set you on the path toward long-term success.
Ignore the noise
Are you the type of person who watches investment news regularly or listens to experts on current market conditions? Maybe you like to keep on top of how the Dow Jones is doing daily by reading your favorite news sites or the newspaper? The best thing you can do right now for your finances and for your own peace of mind is stop listening to all of the noise.
There’s always one expert or another talking about where the market is headed, potentially causing you to panic and worry about your investments. Watching the roller coaster ride of the markets on a daily basis is a recipe for heartburn. Tune out of the incessant noise surrounding market conditions and focus on your financial blueprint to ensure you’re meeting your goals.
Revisit your budget
Instead of obsessively checking your investment fund performance, focus on areas where you have more control such as your budget. Review your spending to see if it aligns with your financial priorities.
If you don’t have a budget, you’re not alone. According to a Gallup poll, only one in three Americans prepares a detailed household budget.
Drafting a budget doesn’t have to be intimidating. It’s basically a spending plan that helps you decide how to allocate money coming in. In order to make informed financial decisions, you need to know how you’re spending your money every month. Putting together a budget simply means putting a framework around your spending and making sure it aligns with your goals.
Look for some obvious places in your budget where you can make cuts without feeling a pinch. If you have a cable TV subscription package, shop around to see what other options out there will fit your needs. Also, call up your cable provider and negotiate a better rate or downgrade to a cheaper package that still gives you the channels you want.
Another good area to review is your cell phone plan. There are many different options for wireless service outside of a traditional contract. Prepaid service providers such as Cricket and Republic Wireless can help you cut down your bill significantly without locking you into a contract.
Other areas that you may want to revisit are your auto and home insurance, your grocery bill, as well as your entertainment, and dining out expenses. Any money you save on your monthly expenses should be funneled directly into a savings account to put toward important priorities such as building an emergency fund, paying down debt, investing more in your retirement accounts or saving for your child’s college education.
Pay off debt
Instead of focusing on things you can’t control such as the stock market, focus on what you can control – paying down your debt. According to Student Loan Hero, the average student loan payment is $351 a month. With the money you’re able to save by revising your budget, you can make extra payments toward your student loan debt to help bring down the balance faster.
If you have credit card debt, paying down that balance will all but guarantee high returns. Many credit card accounts charge interest of 20 percent or more so making a payment will offer a better return on your investment than the stock market. You also get the immediate satisfaction of a guaranteed high return which you won’t get with investing in the market.
Work with your partner or spouse to make a plan for debt payoff. Drafting a plan together will ensure you’re both on the same page for how to tackle any outstanding balances. In addition, it means you can hold each other accountable and cheer each other on through what can often be a daunting undertaking.
As you pay off each additional debt, roll the money you had earmarked for these payments toward taking care of the next balance on your list. This will help expedite the repayment process and give you positive feedback on your efforts.
Review your financial resources
With your big picture goals in mind, take a stock of your financial resources. Look at all of your assets and review your income streams.
Take note of how much of your money is tied up in stocks, bonds, savings accounts, CDs, home equity, business equity, and so on. Make sure you review every account and asset that you have and keep track of them in the long term.
Having an overview of your financial resources in one place that will help you make a better plan for the future. Match that up against your long-term goals to ensure the two are in alignment.
For example, if you plan on retiring in the next five years, you may want to shift some higher-risk investments into lower-risk funds. On the other hand, if you’re not planning to use the money for another 20 years, you may want to take on more risk.
Another upside of reviewing all of your financial resources on a regular basis is that it puts any market fluctuations into a different light. You may have one or two investments that are currently dropping in value due to market conditions but when viewed in the light of all of your assets, they’re likely to have a much smaller impact. Sometimes we get so wrapped up in the latest market fluctuations that we forget to take a holistic view of our finances.
With that in mind, it’s also important to diversify your financial resources. Don’t put all of your money into one or two investments – this exposes you to too much risk.
Make sure you have your savings spread out between investing in the market, real estate, savings account, bonds, and so on. This will give you added flexibility and help you view market fluctuations as more of a blip on your financial radar rather than a full-on catastrophic event.
The most critical thing you can do for your peace of mind is to take a long-term view of your investments. Make a plan for your money that strikes the right balance between risk and reward. This will help guide you during tough financial times and ensure that your investments align with your values and goals.
Getting your finances in order means that stock market fluctuations will have less of an impact on your day-to-day life. In fact, a study in the Journal of Behavioral Science found that people who feel in control of their finances are less likely to be affected by market volatility.
The financial markets move up and down over time but often the best thing to do is stay the course and follow your investment plan. This may be easier said than done but having a blueprint in place will help bring you clarity. It’s never too late to get your finances in order, which in turn will help you weather future market volatility.
This is a post from Clint Haynes, a Certified Financial Planner® and Financial Advisor in Kansas City, Missouri. He is also the founder and owner of NextGen Wealth. You can learn more about Clint at the website NextGen Wealth.