ôô

8 Investing Rules to Follow Even When the Stock Market Drops

No matter what happens in the stock market, Laura covers 8 rules for investing wisely without taking too much risk. Learn how much you should invest and where to put your money so you create financial security even when the stock market drops. 

By
Laura Adams, MBA,
Episode #531
8 Investing Rules to Follow Even When the Stock Market Drops

6. Focus only on what you can control.

Since drops in the stock market are natural and unavoidable, simply stay focused on what you can control. Remember why you’re investing in the first place: to build wealth for long-term goals, such as retirement.

I know watching the markets go on a roller coaster ride can feel frightening. But taking extreme actions when your emotions are running high, like selling investments right when their value drops, is the opposite of what you’re trying to achieve.

What happens to the financial markets in the short-term only matters if you need to liquidate your investments in the short-term. That’s why you should never invest money that you might need to spend within the next 5 years.

Instead, make solid investments that will grow over the long-term, and never get rattled when you see volatility in the stock market. So, stay calm, turn off the news, and ride it out.

Make solid investments that will grow over the long-term, and never get rattled when you see volatility in the stock market. So, stay calm, turn off the news, and ride it out.

Also, put this market correction in perspective. The recent drop is small compared to the huge gains we’ve seen in the market over the past six years. If you maintain a buy and hold strategy that’s focused on future growth, you have ample time to recover.

And if you haven’t started investing, don’t beat yourself up about it. The key factors you can control are opening an account and starting small. If you’re living paycheck to paycheck, figure out how to ruthlessly cut your spending so you can come up with more money to invest.

Squeeze your budget as tight as possible until it hurts and then squeeze a little tighter. Cancel services you can live without, downsize your housing, or sell a vehicle so you can invest as much as possible. Another option is to increase your income with a second job or side gig to boost a low savings rate.

See also: 7 Simple Principles to Invest Money Wisely No Matter Your Age

7. Use tax-advantaged accounts for faster results.

One of the best ways to invest money is under the umbrella of a tax-advantaged account, such as a workplace 401(k) or 403(b). If you don’t have a retirement plan at work or are self-employed, you have options too, such as an IRA, SEP-IRA, SIMPLE IRA or a Solo 401k.

Retirement accounts help you build wealth and cut your tax bill at the same time, which can turbo charge results. Traditional accounts allow you to defer taxation until retirement. Roth options require tax on contributions, but allow tax-free withdrawals in retirement.

Additionally, many employers offer additional retirement matching funds, which is free money that no eligible participant should turn down. But even if your employer doesn’t offer matching, I’m still a fan because contributions come from consistent, automatic payroll deductions. And you can take all your money with you—including your vested matching funds—if you leave the company.

Let’s get back to the question from Sagar R. who hasn’t gotten started investing and is from outside of the U.S. Foreign nationals may be eligible to participate in a workplace retirement account, such as a 401(k), and even get matching contributions. But withdrawing money before age 59½ generally results in owing income tax plus a 10% early withdrawal penalty regardless of your citizenship status.

If you want to open an IRA or a regular investing account, you’re required to be over age 18 with a U.S. Social Security number and a U.S. mailing address.

Free Resource: Retirement Account Comparison Chart (PDF download) - get this handy, one-page resource to understand the different types of retirement accounts.

8. Choose investments based on time horizon

Your “horizon” is the amount of time you have before you’ll need to begin spending your nest egg. For instance, if you’re 40 years old and plan to quit working and live solely on investment income when you’re 65, you have a 25-year investment horizon. This is important to consider because, in general, the longer your horizon the more aggressive you can afford to be.

Start by figuring out how much stock you should own because that’s typically the riskiest type of investment. Here’s an easy shortcut: Subtract your age from 100 and use that number as the percentage of stock funds to own in your retirement portfolio.

For example, if you’re 40, you might consider holding 60% of your portfolio in stocks. In my book, Money Girl’s Smart Moves to Grow Rich, I recommend a variation on this rule that’s a little more aggressive: Subtract your age from 110 to find the percentage of stocks to own. For a 40-year-old, this method shows asset allocation of 70% stocks and 30% bonds and cash.

These investment allocation targets are not hard rules because everyone is different. If you have more than 10 years before retirement, choosing funds made up primarily of stocks, or labeled as growth funds, is the best way to get an optimal return on your investment. Options vary depending on the investing company and type of account, but good choices include mutual funds, index funds, and exchange-traded funds (ETFs).

The saying time is money is the absolute truth when it comes to building wealth for your future.

Many accounts offer target date funds that invest based on the year when you plan to retire. For example, if you want to retire in 2040, the name of the fund would be something like “Target Date 2040 Index Fund.”

Target date funds are very convenient because they automatically rebalance on a periodic basis to achieve growth in the early years, but then become more conservative as you approach retirement.

The saying time is money is the absolute truth when it comes to building wealth for your future. Investors who start late usually have to make huge financial sacrifices to accumulate enough money to reach their goals—or they’re forced to work much longer than they want to.

Getting in the habit of investing consistently sooner, rather than having to invest more money later, is the secret to investment success.

See also: How to Invest Money in Your IRA or 401k Retirement Account

Get More Money Girl!

If you set a resolution to get out of debt this year, awesome! Now it's time to actually learn how to do it. Don't miss Laura's new online class Get Out of Debt Fast--A Proven Plan to Stay Debt-Free Forever. Enroll with an 85% discount for a limited time when you click here to learn more!

If you're ready for help managing debt, building credit, and reaching big financial goals, check out Laura's private Facebook Group, Dominate Your Dollars! Request an invitation to join this growing community of like-minded people who want to take their financial lives to the next level.

To connect on social media, you’ll find Money Girl on FacebookTwitter, and Google+. Also, if you’re not already subscribed to the Money Girl podcast on Apple Podcasts or the Stitcher app, both are free and make sure that you’ll get each new weekly episode as soon as it’s published on the web. The show is also on the Spotify mobile appClick here to sign up for the free Money Girl Newsletter!

Download FREE chapters of Money Girl’s Smart Moves to Grow Rich

Decrease Graph image courtesy of Shutterstock

Pages

The Quick and Dirty Tips Privacy Notice has been updated to explain how we use cookies, which you accept by continuing to use this website. To withdraw your consent, see Your Choices.