Keeping your money in investment accounts is the key for long-term planning. The stock market will go up and it will go down. If stocks drop at least 10% but less than 20% this called a market correction. When investment accounts decline 20% or more, this is called a full-on bear market. The stock market will always go through these cycles. It always has and it always will. They key is to not panic during the down-turn. If you make a wrong move, you could derail your long-term security.
Here are some ways for you to handle a bad stock market:
- DON’T PANIC, RELAX: When stock prices fall, that is a great thing for long-term savings. If you are saving for long-haul, retirement or another goal what is 10 or more years down the road, you should be giddy with falling stock prices. Lower stock prices means that your money will buy more shares! Additionally, when the market rebounds, you’ll have more shares. You should be using dollar cost averaging when investing. Let’s look at an example, If you are investing $500 a month and the fund costs $25 you will buy 20 shares. However, if the price falls to $20, you will now buy 25 shares. What happens 10 years from now? Let’s say the share price has risen to $55. If you had 20 shares, you would have $1,100. Now, if you owned 25 shares, you would have $1,375. Having time to invest presents a great opportunity to buy low when the market is down. If you had panicked and sold off your shares or not bought any shares, you would have a lot less money.
- Be vigilant: Don’t just sit back and leave your investments unattended. You need to ensure that you are diversified with your investments. You do not want all of your investment money in one mutual fund. You need to balance your portfolio. Split your investment into four equal parts: 25% into growth mutual funds, 25% growth and income mutual funds, 25% aggressive growth mutual funds, and 25% international mutual funds. This provides you with a great balance.
- Handle your losses: If you have any investments in taxable accounts, you can save some money by selling losers. If you sell an investment you have owned for at least one year for a loss, you are able to claim a long-term capital loss on your tax return. If you also have a realized capital gain, the loss is used to offset the gain. Thus, reducing your tax bill. What if you don’t have offsetting capital gains? You can still deduct up to $3,000 of a capital loss against your income. If your loss is more than $3,000, you can keep claiming the loss in subsequent tax years until the loss is fully claimed. If you own for less than one year, it is considered a short-term loss. Any short-term losses must first be applied to offset any short-term gains. Short-term gains are taxed at ordinary income tax rates. If you don’t have any short-term gains, then your short-term loss is applied to any realized long-term gains. What happens f you don’t have those either? Then, you get to deduct the loss against your income, up to the $3,000 annual limit.
- Don’t get too conservative: It might feel good to sell your stocks and move your money into cash or short-term bonds right now. You need to be careful. Moving your money out of stocks and into items, like bank CDs or short-term high quality Treasuries is not wise, as they aren’t yielding enough to keep up with inflation. You need to earn more than the growth of inflation for your long-term goals. This is retirement money you will live off 10, 20, 30 or more years from now. This way you will be able to afford future (higher) priced goods and services. If you think that need to wait for stock prices to stop falling to get back into the market, you most likely won’t don’t it. That is the reality. More than likely you will still be sitting on the sidelines when stocks rally and so you miss out on the gain. Don’t try to “time the market”. Please remember that over the long-term stocks are your best shot at inflation-beating gains. Remember you are in for the long-term. This is why your long-term plan is to always have some exposure to stocks. Your personal situation determines how much you should have in stocks. As you get older and closer to your retirement and you have followed wise financial planning, a rule of thumb is to keep your age in safe investments. Let’s say you are 60 and retirement is only five years away. You have invested your money into a nice balance portfolio throughout your working years; at this point, you can put about 60% in CDs or short-term Treasuries. The rest you can leave in stocks.