The stock markets delivered a lump of coal at the end of 2018. December was one of the worst months for investors in years, and when you take a glance at your year-end statements, you will likely see double-digit losses for many of your stock fund and ETF investments.
If you’re unsettled by what is going on, that just confirms you’re human. It is unsettling! But reacting emotionally by abandoning your long-term investing strategy would be a costly mistake.
Please, take a deep breath, and follow my advice on how to handle a rocky stock market.
- Focus on the Big Picture. While stocks lost ground in 2018, let’s not lose sight of the fact that they have been going up for 10 consecutive years. That is a long time that has produced some big gains. Even after a rough 2018, U.S. stocks still have a 10-year annualized gain of 13%. That’s well above the long-term average of 10%. If you are investing for the long-term, it’s how your money grows over time that matters most.
- Keep Investing for the Long-Term. If you are investing for a goal that is 10, 20, or 30 years out, there is actually upside to the recent decline in stock values. Lower share prices means your investment dollars buy more shares. That’s fantastic. Over time those shares will rebound. The more shares you have, the more valuable your account will be. The great thing about workplace retirement plans is that your contributions are automatically taken out of your paycheck; you’re going to be buying more shares on sale. If you also save in an IRA–and I hope you do–please don’t stop now. Keep contributing. You will be glad you did when retirement arrives. Making consistent investments over time, such as monthly or twice a month, is called dollar-cost averaging. It’s a great way to invest.
- Build up Your Emergency Savings. If you are anxious because we’re beginning to hear that a recession might come sooner than expected, it’s not your investment portfolio you should worry about. I am going to keep repeating this: your investments are for the long-term.
An emergency savings fund is how your family can weather a layoff, or reduced hours, if we do head into an economic slowdown. There is no more important investment right now than building up your emergency savings. I encourage you to search for “high-yield savings accounts” online. Many online banks now pay 2% or more for savings accounts that you can link to your checking account. If your savings account is at an old-school bank you’re probably still being paid nothing. Now is the time to move your savings and focus on adding to it. If you have eight months of living expenses saved up, you are going to be in solid shape to deal with any setbacks a recession might deliver.