5 Tips for investing during turbulent times
Mature investing requires these five things
The trickiest part of investing is staying invested when the market becomes turbulent or the economy starts to falter. We fear we will lose everything; we mourn the reduction in our account balances; it seems as if the market will go down forever.
Moreover, when the market is volatile, we get to hear about it every day in multiple ways; with predictions of doom and gloom abound. We always seem to be at the mercy of the market, which is frightening.
Reframing how you think about investing during times of turbulence is key to staying sane (and remaining invested). Remember this: The market pricing for any investment changes daily; it goes up or down every day, sometimes a little, sometimes a lot. History tells us that we’ve never had a market that didn’t come back from a fall – eventually.
These five tips can help you navigate these treacherous times. Learn these and you will be well equipped to weather any market turbulence that comes our way.
Tip No. 1: Don’t panic
It’s easy to panic during difficult times. After all, a precipitous drop in the market is scary. It can make one wonder, “What have I done to my future?” Keep in mind that the overall market always recovers from inevitable dips. Resist the temptation to “go to cash.” If you do that, you’ve actually lost money and it is nearly impossible to know when to get back into the market. Many people stay on the sidelines for many years, giving up substantial gains.
Tip No. 2: Invest in good companies
How do you define “good companies?” First, have a bias towards big company stocks in a difficult time. Look for companies that have strong revenues and profits. Think about their products: Will the products be around in five or ten years? Does the company have a strong record of innovation, essentially future-proofing their revenues? Do they have a track record of paying and increasing their dividends?
Can you name some companies that have good revenue, profits and dividends, but will be challenged to continue to grow because their product is outdated, or consumer preferences have changed? Most likely you can. A Foundation for Economic Education May 2020 study says that only 52 companies that were on the Fortune 500 list in 1955 are still on the list in 2019. This is positive because it indicates a dynamic economy, but it is also a signal to pay attention to your investments. Buy and hold is good, but it does not mean buy and forget.
It’s easy to say, “Buy good companies,” but how do you actually do that? It takes research and hard work. If you don’t want to do research, then buy a good mutual fund or exchange-traded fund with a bias towards quality. Let the professionals pay attention for you.
Is it worth it to invest? Yes. Investing is a long-term strategy that helps build wealth, but it is not without risks and mistakes. Pay attention and know that profits come from turbulent times by adding to holdings during declines and profit.
Tip No. 3: Reconsider your risk tolerance
Even veteran investors were concerned when the market fell over 30% in a single month. Did you reach for the phone and yell, “Sell everything?” Hopefully not, but if you did, you have the wrong investments for your temperament. Reassess feelings about market declines – it will happen many times in one’s life – and invest accordingly.
Don’t know how to do this? Find a good financial advisor who can help navigate the markets.
Tip No. 4: Take your profits
It is important to periodically take profits from investments and redeploy the money, either in additional financial assets or to help beef up an emergency fund for bad times.
Tip No. 5: Mind your security
Make sure you are taking care of security needs before investing. Is your debt too high? If so, bring it down fast. Do you have adequate cash for emergencies? We all got a master class in the need for adequate cash reserves in the last few months. You should have six months spending money, and it should be in cash.
A volatile market need not slam shut a door of doom on anyone’s portfolio. It is still possible to make measured investments, to grow a portfolio and weather a storm. Maturity (in investing) means knowing that this is one of many storms over the course of a portfolio’s lifetime.
Disclosure: The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Please consult your financial advisor regarding your specific situation.