As stock prices continue to fall, it’s not an easy time to be an investor. The S&P 500 it is well into correction territory and is approaching a bear market. If you have money tied up in the stock market, this recession can be hard to digest.
While no one knows how long this downturn will last, the market will eventually recover. Market corrections and even declines are normal, and it is only a matter of time before stock prices recover.
In the meantime, however, there are a few things you can do to keep your money as safe as possible.
1. Strengthen your emergency fund
Market crashes are some of the worst times to sell your investments. Stock prices are at an all-time low, and if you withdraw your money during a recession, you’ll likely end up selling your investments for less than you paid for them.
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For that reason, it’s smart to have at least a few months of savings stashed away in an emergency fund. That way, if you face an unplanned expense during a market downturn, you can afford to cover it without dipping into your investments.
2. Make sure you are diversified
A well-diversified portfolio can give your investments a better chance of recovering from a downturn. Not all stocks will survive periods of volatility, and if all your eggs are in one basket, so to speak, you risk losing a lot of money if your investment doesn’t recover.
While there is no hard and fast rule about how many stocks you should own, a general rule of thumb is to make sure your portfolio contains at least 25 to 30 stocks from a variety of industries. This will give you more protection against recessions, because if one or two of your stocks don’t do well, your overall portfolio won’t be as affected.
3. Double check your asset allocation
Asset allocation refers to how much of your portfolio is allocated to stocks versus bonds, and is especially important for those approaching retirement age.
When you’re young and have many years to go before you plan to retire, you can afford to invest more aggressively in stocks. Even if his portfolio takes a hit during a recession, he has plenty of time to let it recover before he needs that money.
However, as you get older, your portfolio should gradually become more conservative. Bonds and other conservative investments often earn significantly lower returns than stocks, but are also less affected by market volatility. If you’re nearing retirement, shifting your portfolio more toward bonds can keep your investments safer when you need them most.
4. Review your investments
The investments you choose will be key to your performance during a market downturn. Risky stocks of unstable companies can sometimes do well when the market is up, but they’re also more likely to crash and burn during periods of volatility.
The best investments, then, are those in solid companies with strong underlying business fundamentals. The healthier the organization overall, the better its chances of surviving a market downturn.
These types of stocks may not deliver explosive returns in the short term, but investing is a long-term strategy. When you choose your investments based on the overall strength of the company, you’re much more likely to earn positive long-term average returns despite volatility.
Market downturns are challenging and it’s normal to feel nervous about the future. But they won’t last forever and the market will eventually recover. By taking a few steps to prepare now, you can worry less knowing your money is as safe as possible.
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