Markets are in free fall due to high inflation and the Fed raising rates to combat it. The economy appears to be in recession. Almost every day this week, the Dow Jones Industrial Average was up 1,000 points or down 1,000 points. The volatility index is in the 30s and 40s. During calm times, the volatility index is between 10 and 20. These are not normal times, that’s for sure.
You hear stories of the stock market crashes of 1987 (Black Monday), 2008 (financial crisis) and 2020 (coronavirus). Your portfolio is down 20-30% in the last year. A lot of people I know are frightened to even check their 401(k) balances.
What is an investor to do in these tough times?
Don’t Panic
It’s easier to say than to do it. Don’t panic and try to stay calm. Don’t check your stock quotes every 10 minutes. Besides driving you crazy, it also stresses you out. Be aware of what’s going on in the markets but don’t follow the news every minute
Keep adding to your 401(k) as you have. If you have been investing in mutual funds outside of your 401(k), go ahead and continue that as well.
Don’t Liquidate Your Investments
As the value of your portfolio decreases, it is easy to consider selling everything and going to cash. You might think that you can re-enter your positions after the storm has passed.
Market timing is very hard. Even professionals who have been investing for decades can’t time the market. You need to remain committed through thick and thin as an investor.
Put Cash To Work
If you have money on the sidelines, put it to work in the market. With the stock market down more than 20%, many good companies are trading at favorable valuations. Choose stocks that have a high moat (competitive advantage) in their industry.
Your stocks are likely to decline after you purchase them. If you did your homework and bought high-quality stocks, ignore the market volatility.
Good Time To Invest In Dividends
As stock values decline the yield on dividend-paying stocks increases. It is not uncommon to find a stock that yields more than 6%. Do your homework to ensure that the dividends are not at risk and that the companies can afford to pay them.
Recession is a perfect time to pick up dividend stocks. Many dividend aristocrats increase their dividend payout every year. When you invest in them, stocks will yield a passive stream that increases every year.
Reinvest Dividends
A market downturn is also a good time to reinvest your dividends. You can use your dividends to buy stocks at attractive prices. This will give you a passive income stream that increases if the companies raise their payouts in the future.
Review Your Budget
A downturn is a good opportunity to review your budget and reduce costs. Call the cable and phone company and ask for discounts. Businesses are usually likely to provide discounts to keep customers in a recession.
Wait. Wealth is made in the waiting.
Waiting patiently for the market to recover is not fun. It’s boring but wealth is made in the waiting. Once the market and the economy regain their senses and return to normal, your portfolio will recover as well. Any investments you have made in the downturn will rise sharply because markets rebound most of the time.
The government and the Federal reserve pursue measures to get the economy to grow again. When the economy recovers, so do stocks.
Bottom Line
Significant wealth can be made coming out of a recession. Put your extra cash to work. Buy financially strong companies, and remain invested during the downturn. Don’t panic. As scary as it might be, things still return to normal as the government and the Federal Reserve introduce measures to get the economy back on track. Your job is just to remain focused on the long term and ignore the short term fluctuations.
