How to Invest in a Crazy Market
The financial markets are experiencing unprecedented times. We have seen record-breaking ups and downs in a single day, and that trend will likely continue into the new year. These crazy market conditions can make even the most confident investors question their decisions. So, if you have investments in the market or are considering investing, here are some thoughts and tips on how to navigate these uncertain times.
Hard times will pass
The first thing to keep in mind is that the economy is cyclical. In typical market conditions, it is not unheard of for the market to go down 10% at any given time, in any given year. There have been years when the market drops 20% mid-year but ends the year up 10% overall. Even in the best of times, the markets can feel like a roller coaster if you keep a close eye on them, but the good news is that historically, there are more good investment years than bad.
Rely on dollar cost averaging
One of the best ways to deal with crazy market swings is to stay the course. Dollar-cost averaging is one way to do that. Put simply, dollar-cost averaging is an investment strategy in which you invest a set amount at regular intervals, allowing you to reduce the overall cost of your investments.
For example, if you are investing $400 a month and January was a bad month for the markets, it’s actually a good thing because you will be able to buy more investments because their cost is lower. During a better month, new investments will cost more, but your existing investments will grow more quickly. If your portfolio is well diversified and your investments have been placed in risk categories based on your goals, you should be able to weather the ups and downs and still successfully work towards your overall goals.
Dollar-cost averaging does not assure a profit and does not protect against loss in declining markets. Since dollar-cost averaging involves continued investing regardless of fluctuating securities prices, you should consider the ability to continue purchases over an extended period of time.
Diversification is key to any strategy and should be a part of any investment game plan. Diversification is exactly what it sounds like—having your investments spread across different types of asset types so you can spread out your risk. The common saying for this is “don’t put all of your eggs in one basket.” It is important to note, diversification does not ensure a profit or guarantee against a loss.
The same is true when investing. When one investment sector (ex: utilities, technology, healthcare) is going through a down time, another sector may go through an up time. If you are diversified and have investments in multiple investment sectors (covering as many bases as possible), the ups and the downs will balance each other out during market fluctuations.
Balance your accounts
With any business, there will be good years and bad. This is also true for your investment portfolio. When the market is experiencing unprecedented ups and downs, as it is now, checking your accounts every day or once a month may cause unnecessary stress and may cause you to make rash decisions. It is, however, good to assess your portfolio at least once a year to see if risk tolerances have changed or life events may have changed that could change your strategy on how you would want to invest your money.
If it’s a great year for the market, you might choose to take some of the “profits” and move them into something less risky just in case the next year could be a year where your portfolio could be impacted negatively. If the market is experiencing a down year, investing while the costs are low could be the right option for you. Regardless of what is happening in any given year, working with a professional financial advisor can help you make these decisions and help to ensure your money keeps working for you.
Keep your emotions in check
It’s easy to feel fear when you see your investments losing money. However, it’s important not to allow your emotions to control your investment decisions. This is where a financial advisor can help by offering an objective, professional, third-party perspective. Financial advisors base their decisions on statistics, current market trends, and historical market trends to help you reach your personal financial goals.
If you decide to work with an advisor, it’s important to be prepared. Two questions you should come prepared to answer are:
- Are you here to meet a short-term (1-2 years), mid-range (2-5 years) or long term (5-+ years) goal? And what is that goal?
- How comfortable are you with risk?
If you need money in five years or fewer, you may want to keep your goals more conservative. You can take a little more risk on your long-term goals as you and your money will have time to ride out the down times and take advantage of the ups.
Don’t stress and keep investing
The best time to invest money is yesterday, today and tomorrow. The best time to take money out is when you need it. If you can avoid impulse or emotion-based investing or withdrawing and stick with your game plan, you will be on the right path to financial independence and have confidence your financial goals will succeed.
If you liked this blog, you may also enjoy:
Your 401(k) Coronavirus Guide: How to Rollover Funds
What You Need to Know about the SECURE Act
The Skinny on Financial Advisor Fees & Commissions
How to Overcome the Retirement Gender Pay Gap
How to Invest in a Bear Market
How to Start Investing on a Low Budget
Mutual Funds, Simplified
The Pros and Cons of Roth IRA Conversions
Should You Keep Working after Retirement
The views and opinions expressed in this blog are those of the authors and do not necessarily reflect those of VSECU.
Representatives are registered, securities sold, advisory services offered through CUNA Brokerage Services, Inc. (CBSI), member FINRA/SIPC, a registered broker/dealer and investment advisor, which is not an affiliate of the credit union. CBSI is under contract with the financial institution to make securities available to members. Not NCUA/NCUSIF/FDIC insured, May Lose Value, No Financial Institution Guarantee. Not a deposit of any financial institution. FR-3159479.1-0720-0822
About Walter Lother
I was born and raised in Vermont. I have been a professional financial advisor for nine years and enjoy helping individuals make sense of investing and working with them on their goals to accomplish financial independence. When I am not in the office, I can be found spending time with my wife, our daughter, and our two dogs.