7 investment strategies to defy a downturn
The worst rout in stocks since 2011 makes it hard not to feel edgy. But the best investment strategy is to sit tight, financial experts say.
"It's important to not push the panic button," says Greg McBride, chief financial analyst at Bankrate.com. "To panic and sell guarantees nothing more than locking in those declines."
Here's some grounding. Traditionally, a bear market occurs when several broad market indexes are down by at least 20% over a 2-month period. During the 3rd week in August, the Dow Jones Industrial Average fell nearly 10%, while the S&P 500 was off 6%. Those indexes continued to decline on Monday.
"Markets often recover as quickly as they fall, so it is important to just hang tight, rather than trying to jump in and out," says McBride. "These pullbacks also represent a very attractive buying opportunity for long-term investors."
7 investment strategies
Go to Las Vegas to gamble. Otherwise, stick to these 7 money strategies during a market retreat or rally:
- Don't treat your money as a lump sum. Divide and earmark it for certain goals.
- Figure out those goals, which can be retirement, paying for your kids' college tuition, buying a car or financing a house.
- Identify the time horizon for each financial goal. Do you want to buy a house in the next 6 months or 5 years? Do you want to retire next year or in 30 years?
- Invest the money for your short-term targets. For goals like buying a car or a house in the next few months to 2 years, put the cash in less risky investments like a savings account, certificates of deposit or money market account. That money will grow marginally, but won't be subject to huge losses. The Federal Deposit Insurance Corp. insures deposits up to $250,000.
- Invest your long-term money. For far-off goals like retirement or paying for college tuition, think stock market. The key is to keep up with the rate of inflation, and that's the best way to do it.
- "Draw a line in the sand for when to get in and get out," says Phil Cook, a Certified Financial Planner professional at Cook and Associates in Manhattan Beach, California. "That way, you don't have to sweat it out." Cook recommends making these decisions as soon as you invest the money, not as you ride the roller coaster of volatility.
- Set triggers for buying. Market downturns present opportunities to buy investments that may have been too expensive before. Establish those limits in advance and follow through.