If you had money invested in the stock market in 2018, you may be feeling a tad bit of anxiety. Well, maybe a whole lot of anxiety. That’s because last year was the worst year for stocks in a decade, with the S&P 500 down 6.2%, the Dow falling 5.6%, and the Nasdaq dropping four percent. Yikes.
As we move into 2019, you may be wondering if the stock market will continue to decline or whether it will rise. While no one has a crystal ball to see into the future, some financial experts believe a period of slowed economic growth is headed our way, according to Investor’s Business Daily. So, what can you do to prepare for a potential market downturn in 2019?
There are many steps you can take to protect your finances and stay ahead in the event that we head into a period of financial decline. Take a look at these four tips from financial experts:
1. Set expectations for your money
First things first: Figure out your money goals. For example, if you need cash for short-term goals, like living expenses and paying off debts, this money should ideally be held in an emergency fund or another savings account that isn’t subject to stock market fluctuations, says Ellen Duffy, CFP and owner of Parkway Wealth Management in Boston. Parkway’s services are provided through Aevitas Wealth Management, Inc., a registered investment advisor.
According to Duffy, you should keep three to six months worth of expenses in an emergency fund. This way the cash is available if you should need it for any unforeseen reason, like a job layoff or major car repairs.
Also, consider life cycle changes happening in your life now or in the near future. For example, are you expecting a baby, planning to buy a home or considering leaving your job to start a business? If these or other life changes are on your horizon, you’ll want to beef up your cash reserves – regardless of which direction the stock market goes.
“Understanding that you have ample cash on hand can a great tool for being patient during periods of market fluctuation,” says Duffy.
2. Understand that market fluctuation is part of investing
Here’s a fact: Market declines are part of investing.
“They occur regularly and are difficult to predict,” says Duffy.
So, why do we feel nervous and emotional when the stock market declines?
“Because we are human! It is natural to feel uneasy during periods of market volatility,” she says.
But, here’s the good news: Declines don’t last forever and generally speaking – while past performance does not predict the future – markets do go up over long periods of time – “they just don’t go up in a straight line,” says Duffy.
The best thing you can do if you’re worried about the volatility of the stock market is to educate yourself on the fluctuations over time, prepare for this and ride it out. Remember: What goes down, will come back up.
According to Fidelity, it’s impossible to predict when the good and bad days will happen. If you miss even a few of the best days, it can have a lingering effect on your portfolio. For this reason, it’s best to stay the course.
Adds Duffy, “try to avoid making emotional decisions or trying to time the market – both actions can be harmful to investment performance.”
Here’s another tip: A market decline can be a good time to add to your investments – that is, if you have ample cash on hand, are prepared to invest long-term, and can handle potential volatility. Think of this like getting a great deal on a vacation or new car.
“People love to buy clothes, cars, airline tickets etc. when they are available at a reduced price… yet this premise often doesn’t translate to some investors,” says Duffy.
When stock prices fall, this may benefit you as you may be able to buy more shares or spend less money per share. Case in point: The worst times to jump into the market may actually turn out to be the best. For example, the best 5-year return in the U.S. stock market began in May 1932—in the midst of the Great Depression, according to Fidelity.
3. Don’t put all your eggs in one basket
Ok, this may seem cliche but this major premise in investing is also called “diversification.”
“Downside risk and performance can be amplified if you are invested in a single asset class or single stock – also referred to as ‘concentrated position risk’,” says Duffy.
Instead, you should consider investing in multiple asset classes, including: large cap stocks, growth or value stocks, and small cap stocks. You may also want to consider investing in international stocks, emerging markets, commodities, real estate, and multiple categories of fixed income securities.
“Each asset class has its own attributes and over time may outperform or underperform for any given period ..and no one particular asset class has been the top performer year over year.”
If this information seems too high-brow, let’s boil it down this way: Diversifying, or spreading your investments across various asset classes, may help lower the fluctuation in your portfolio. To create a diversified portfolio, it’s important that you also understand your risk tolerance, as well as your timeline and goals for investing.
4. Save money automatically
Regardless of whether you have a lot, a little or no money in the stock market, it’s important that you save money. This can help you during a time of financial uncertainty (see #1). It can also help you reach your financial goals regardless of whether the market goes up or down.
A good way to stash away more money is to automate your savings. If you open a no-fee Chime Bank account, you can start saving more money right away. How? You’ll get a Chime Visa Debit card and every time you use your card, Chime will round up your transaction to the nearest dollar and deposit that change into your Chime Savings Account. Those pennies add up – fast. For example, if you use your Chime card twice a day on average, you’ll save more than $300 a year – without even thinking about it.
Stay the course
We get it: A potential stock market downturn may cause you to feel stressed out. But, if you use the four tips above, you’ll be more apt to weather a financial storm.
With that in mind, here’s a final pro tip: If you want or need more expertise on how to best manage your money, it’s a wise idea to seek help from an investment professional or financial advisor. This way you’ll have an expert who can help guide you through market ups and downs, as well as help hold you accountable to your money goals.