When the market goes caput, should your investment strategy be to stay put?
Yes, generally. The conventional wisdom is that you shouldn’t freak out when the market tanks. Markets go up and down, and if you’re investing for the long-term (as you probably should be), selling any time the market takes a dip only serves to lock in your losses. Remember, it’s about time in the market, not timing the market.
Okay, so just because there’s a market sell-off doesn’t mean you need to take part. But what about investing during a downturn?
Look at a downturn as an opportunity
Here’s something you may not know: Stock market wealth is heavily concentrated among the wealthy. As of 2016, the richest 10% of American households hold 84% of the stock market total value, according to researchers. And on top of that, only around half of Americans own stocks of any kind—either directly, or as a part of a fund (like a 401(k), for example).
What does it all mean? That the middle class is largely left out. And when the market takes a turn, it can be a chance to play catch-up.
Investing when the market tanks
Remember, markets go up, and they go down—it’s a part of a cycle. And when the market goes down, you can think of it as an opportunity to buy stocks at a discount. So, if you have the means and can tolerate the risk, it’s not necessarily a bad idea to consider investing when the market drops.
That doesn’t mean you should put your financial livelihood at risk, however. It’s always important to keep the full economic picture in mind. If you don’t have an emergency fund built up, it may be best to set some money aside before going on a stock market shopping spree. You’ll also want to make sure that you start investing for retirement before you consider investing in the markets for other wealth-building objectives.
Of course, investing always has its risks. The market could always drop even further, immediately earning you a negative return. There are several other types of risk to consider, too, as an investor, including risks associated with interest rates and inflation—particularly when you buy bonds.
So, you plan to stay the course? Perfect. Just make sure you stick to a sound strategy.
First, make sure your portfolio is diversified. If the market is tanking, there’s no guarantee that it’s going to stop—look at your holdings and see if you’re overexposed in one sector, asset type, or geographic region. If your portfolio is stock-heavy, for example, consider investing in some bonds, and vice versa.
Also, keep in mind that you’re investing for the long-term and that you shouldn’t try to time the market. Even though you might be getting stocks at a discount when the market goes down, assuming you choose to buy, it’s typically best to keep investing at regular intervals—it’s called dollar-cost averaging.
So, stick to the basics, and you should be in a good position when a recovery rolls around.