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Every investor needs to know how to navigate a down market. Learn about a strategy that avoids losses and offers significant long-term benefits.
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Investing in stocks is widely recommended, because it’s a highly effective way to build wealth. The stock market’s average return is about 10% per year, stretching back decades. Over time, returns like that can help you grow your money much more than you could if you kept it in a savings account.
The stock market is also volatile, though, and it doesn’t steadily increase day over day, year over year. It can drop in value, including for extended periods. For newer investors, this is often an unwelcome surprise. And it could make you question what you should do.
Every investor is going to experience this eventually, so you need to know how to navigate it. The good news is that if you keep a cool head, you could end up making a lot of money by investing when the market is down.
Stick to the investment plan
The best move you can make as an investor is to have a plan and stick to it, no matter what’s going on with the market. That means figuring out exactly how much you’ll invest and how often.
For example, you could decide to invest $500 or $1,000 on the 15th of every month. You could also go a step further and set up automatic investments, which is a feature most top online stock brokers offer. If your income fluctuates, another option is to invest a fixed percentage of it, such as 10% or 15%.
Once you have this planned out, you don’t need to make any changes when the market is down. Continue investing like you always do. There are a few notable benefits to investing this way:
It takes emotion out of the equation. When you don’t have a plan, you’re more likely to make rash decisions, such as not investing more money because your portfolio took a hit.It ensures you’re investing consistently. The most successful investors are the ones who make it a habit.It’s easy and saves you time. There’s no need to think about whether it’s the right time to invest or if you should wait until later.
Now, you’re not always going to get the best possible price. But focusing on that is actually a common investing mistake. It’s impossible to time the market, meaning to know when prices are going to rise and fall.
What we do know is that over long periods, the stock market has grown. It has also recovered from every down period and market crash so far. There’s no way to know when prices hit rock bottom. If you simply invest regularly, regardless of market conditions, then odds are that some of your investments will happen when prices are low. That means you get the stocks you like at a discount.
Make sure you have a balanced portfolio
A well-designed, diversified portfolio is the key to making this work. It’s risky to have a portfolio that’s heavily reliant on a few companies or industries.
There are a couple of ways to build a quality portfolio. You could pick companies yourself. This is more time consuming, as a diversified portfolio will generally have about 25 to 30 stocks.
The quicker option is passive investing, where you put your money in funds that do the work for you. For example, you could buy shares of mutual funds that track a specific market index. A widely recommended option, which also happens to be my main investment, is a total stock market index fund. This is designed to track the performance of the entire U.S. stock market.
With so many ways to passively invest, including robo-advisors and mutual funds, it’s easy to set up a winning portfolio. Once you do, decide how much you want to invest and when, and follow that plan through the market’s ups and downs.
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