Panic-Proof Your Investments
What you need to know to stay calm, cool, and collected during a down market.
Laura Adams, MBA
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Panic-Proof Your Investments
If you’re scared to even look at the envelope that holds your latest investment account statement, this episode is for you!
When the financial markets are down, the true nature of our risk tolerance is revealed. Whether you’re a river boat gambler or a stuff-the-cash-in-the-mattress kind of person, you’ve probably been wondering what changes, if any, you should be considering for your investments right now!
Check Your Emotions
The most important rule of investing is to get your emotions out of the process. Fear and greed are very powerful motivating forces that can destroy portfolios. In other words, don’t panic. This is because panic leads to rash decisions that may turn out to be bad decisions. Just like there’s a waiting period for buying a gun, consider imposing a waiting period on yourself before making any large-scale investment decisions. Unless you’re a seasoned short-term trader, simply let your plan for any changes soak in for a day or two before you pull the trigger on them.
Focus on What’s in Your Control
Once you’ve done some deep-breathing and exhaled out the panic, focus on what you can control. A majority of the factors in the economy that affect your portfolio are simply not under your control–so why worry about them? Mother market is going to do what she sees fit. Your job is to observe what she does as calmly as possible, go with the flow, and react in the most rational way possible for your circumstances.
Do Your Homework
If you’re considering some changes to a 401k plan, for example, thoroughly research your options. Most plans offer on-line account access to participants. If you’re not sure what funds you’re buying with your contributions, get in there and take a look. You’ll see your balance for each fund, the percentage return over different time periods, the amount of company matching you may have received, and a lot more.
Depending on your specific plan, you may not have a huge selection of funds in which to invest. Employer-based plans may only offer a dozen or so mutual funds. There is usually some type of cash management fund that invests in safe instruments like U.S. treasuries, CDs, and other government securities.
Stop the Market, I Want to Get Off!
If you’re feeling really frazzled, re-allocating your money to more conservative funds is a way to step off the market playing field. There’s nothing wrong with preserving your money by staying on the sidelines until your growth fund options turn around. And if you choose to sell your non-retirement accounts and hold them in real cash until rosier times, some investment gurus would pat you on the back right now. Although others experts would encourage you not to succumb to panic by selling low.
But please remember that although you can easily sell and buy funds within your qualified retirement accounts, there are regulations that impose a steep 10% penalty for actually withdrawing your funds early.
Keep Good Habits
It’s important to keep up the habit of investing or simply saving, if you prefer. If you’re unhappy with the fund choices in your employer-based plan, let Human Resources know. They may have the ability to add additional requested funds to your plan menu that would make you feel more at ease.
Don’t forget about the benefits you may be receiving from company matching. If you’re fortunate enough to receive a percentage match on your 401k contributions, it can easily offset some losses in your account.
Dollar-Cost Averaging
There is an advantage to being in a bear market–it’s called “dollar-cost averaging”. This means buying a fixed dollar amount of an investment on a regular schedule. If you’re making a level contribution of $200 per month to a retirement account, for example, this is what you’re actually doing. Your $200 investment buys more shares when their prices are low and fewer shares when prices rise.
This buy-and-hold strategy allows you to accumulate shares that will boost your portfolio when bullish times return and prices of those shares rally. However, you still need to be picky about what you’re buying. Loading up on shares of a fundamentally bad stock or fund just because it’s cheap doesn’t make sense. There will be plenty of opportunities to buy solid stocks or funds that you may have thought were too expensive to own in the past.
Stay Informed
And speaking of bullish times, stay informed about the state of the market so when prices increase you’ll be ready to re-allocate your money as best fits your circumstances. If you have a long time horizon for retirement, you’ll want to consider getting back into good growth funds to maximize your returns. But if you have less than ten years to go for retirement, are highly risk-averse, or will need the funds in the short-term, then staying in conservative options will be best for you.
Cash Reserves are Smart
A smart portfolio always includes enough real cash, no matter where you keep it. I want to recommend that you shore up your emergency fund. Knowing you’ve got dollars in a safe place such as an FDIC-insured bank will give you confidence and help reduce stress. Three to six months of living expenses should be your absolute minimum amount to have on hand as your own insurance policy against job loss or unexpected financial needs.
It’s said that knowledge is power. I do believe that gaining investment knowledge and staying on top of your portfolio can make you feel better, because you feel more in control. That’s easier said than done in bear markets, I know. But until the bulls are back in charge, if you feel the urge to panic, remember to act on what you can control and keep your long-term investment goals in sight.
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Since everyone’s situation is different, this podcast is for educational purposes only and is not intended to be a substitute for seeking personalized, professional advice.
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About the Author
Laura Adams received an MBA from the University of Florida. She’s an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura’s previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.