Bear markets are tough on all investors, but they can be especially nerve-wracking for new investors who are still learning the ropes. Some may feel they're doing something wrong because they're losing money, and that could tempt them to make decisions that turn a temporary loss into a permanent one. If you're new to investing and aren't sure how to handle a market crash, try some of these tips.
1. Focus on the long term
Losses can be devastating, but you have to remember that if you've invested in sound companies, they're probably temporary. You often don't need to do anything to fix the situation because it'll fix itself in time. In fact, trying to sell your investments off quickly before you lose more money or buying more feverishly to try to make up for your losses could just create more problems for you.
There are some cases where you should rethink your asset allocation. For example, if you only have your money invested in a couple of stocks and they're all in a single sector, that's a clear sign you're not diversified enough. You're putting yourself at risk for huge losses if your few investments don't do well, so it makes sense to move some of your money around. But when you're already well diversified and invested in large, stable companies, often the best thing you can do is leave your investments alone.
2. Stop checking your portfolio every day
If looking at your portfolio is stressing you out and tempting you to make rash moves, it's best to step back for a while. Don't check on it every day or every week. In reality, even month-to-month performance doesn't matter that much when you plan to hold a stock for decades.
See if you can set up automated contributions if you haven't already. This automatically pulls money out of your bank account every month and invests it according to your direction. This is actually a strategy known as dollar-cost averaging. It's a great one for most investors, but especially beginners because it's so simple. You don't have to time the market. You just invest a regular amount of money on a predictable schedule. Sometimes, you'll buy when prices are high and other times when prices are low. In the end, you pay a fair price for all of your shares.
3. Consider an index fund
Index funds are a great way to diversify your portfolio, and you can easily use dollar-cost averaging to invest more in them over time. An index fund is a type of mutual fund or exchange-traded fund (ETF) — a bundle of stocks you purchase together. What sets them apart from other mutual funds or ETFs is that index funds are created to mimic the performance of their underlying index. So an S&P 500 index fund contains the stocks of all 500 companies that make up the S&P 500.
The idea is that when the index does well, the people invested in index funds do well too. And that strategy works well for a lot of people. Warren Buffett is a huge fan of index funds and once bet a top hedge fund manager that it couldn't outperform an S&P 500 index fund over 10 years. Buffett won in a landslide.
Index funds usually don't deliver the exact same return as the index itself because, like all mutual funds, they have some fees, known as expense ratios. But index fund expense ratios are usually extremely low. The Vanguard S&P 500 ETF only charges you $3 per year for every $10,000 you have invested in it. These low fees help you hold onto more of your earnings, which are often pretty substantial over the long term.
If you'd invested $10,000 in the Vanguard S&P 500 ETF at the beginning of 2011, you'd have nearly $42,000 as of the end of May of this year. S&P 500 index funds see their ups and downs. But again, as long as you're focused on the long term, these short-term fluctuations shouldn't worry you too much.
It can be difficult to have confidence in your investing decisions when you're still new to the game, but in a market crash, second-guessing yourself can have devastating consequences. Take a good hard look at your portfolio to decide if there are any serious issues, like a lack of diversification, that need to be addressed. But otherwise, stay the course and keep reminding yourself that the market will recover eventually.
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