When stocks are plunging, the best advice is often to do nothing. You’re not supposed to panic or make rash changes to your investing strategy. But doing nothing while your portfolio tanks can be hard.
Fortunately, if you’re the type who must do something when markets get extra volatile, there are a few sensible and safe steps to consider that could help your finances (and your stress levels).
The stock market has been experiencing a major selloff in recent weeks, and the S&P 500 — a common benchmark used to measure how the overall U.S. stock market is doing — is down around 16% for the year. The volatility comes as investors try to understand what the Federal Reserve hiking interest rates means for their investments, especially after enjoying years of monetary policy that allowed them to make money via stocks with relative ease .
Financial advisors tend to say that when your portfolio is scarily in the red, the best approach is to stay the course . That’s not so easy to do.
“If you feel like you have to do something, do something that’s not extreme,” says Dan Egan, vice president of behavioral finance and investing at online investment advice company Betterment.
Here are four actions that may actually be good for you to take when the market is volatile.
Start Now Ensure you have an emergency fund
Investors who panic during market downturns are often those who haven’t set aside money for the short term, Egan says. Financial advisors say you should have enough money to cover at least three to six months’ worth of expenses that you can access at any time in case of an emergency, like losing your job. (Of course, the exact amount you should have saved depends on your specific situation.)
“Having a fully-funded safety net allows you to take on more risk and be less concerned about it than if you’re living on the edge,” Egan says.
Being prepared financially for a worst-case scenario can allow you to invest for your future. For example, a retiree with enough cash to cover the next one to two years would be more comfortable taking on higher risk in the market and let their money keep growing , Egan says.
If you don’t have an emergency fund, now is a good time to start saving . Rebalance your investments
Rebalancing is a way to ensure that your portfolio’s asset allocation still aligns with your risk tolerance and time horizon. A selloff is a great time to check in.
Financial advisors recommend having a well-diversified portfolio , meaning that you have a healthy mix of financial assets, like stocks, bonds and cash. Within those categories, you also want to own different types of assets. For example, your stock portfolio shouldn’t consist only of shares of large U.S. companies like Amazon and Apple . It’s good to also have small- and mid-cap stocks as well as international stocks, and you can get a wide basket of those via funds .
Rebalancing can help you get back to that diversified portfolio if it’s gone off course due to changes in the markets. Not all financial assets perform well at the same time, says Sean Williams, wealth advisor at Sojourn Wealth Advisory. For example, when COVID-19 hit the U.S. in March of 2020 and stocks plummeted, Treasury bonds held their ground. Ideally, when one part of your portfolio suffers, other areas help you weather the storm.
Williams uses soccer as an analogy with clients: When kids first learn how to play soccer, they’re all kicking each other in the shins because they’re piling up in one area of the field — that’s what undisciplined investing looks like. But professional soccer players are spread out across the field with different roles, so that both their offense and defense are more balanced and effective.
Rebalancing refers to when investors sell investments that have grown in value and replenish investments that have fallen in value to get their portfolio back to holding its target weights. In other words, you sell high and buy low. That way, the portfolio can be as diversified and balanced as it was when originally conceived.
Start Now Consider tax-loss harvesting
There may be a bright side if the stocks you own are plunging: It’s potentially an opportunity to lower your annual tax bill via tax-loss harvesting.
When you sell an asset (including cryptocurrency ) and make money, that profit is taxed by the IRS . But if you sell an investment when its value is lower than […]
source 4 Investing Moves to Make Instead of Panicking About Volatile Markets