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There’s no denying that the start of 2022 has been somewhat of a roller coaster ride for investors. Or would it be more accurate to call it a train wreck?
Metaphors aside, stocks have been stuck in correction territory for weeks, and turmoil overseas isn’t helping matters. Now the good news is that so far, we’ve yet to see a full-blown stock market crash like the one that ensued in March of 2020 on the heels of the COVID-19 outbreak. But we’re also by no means out of the woods as far as that possibility is concerned.
Even if stocks don’t sink into bear market territory, a prolonged correction is no easy thing to deal with. But here are a few tips for getting through one.
Image source: Getty Images.
1. Leave your portfolio alone
When stock values keep plunging, it’s hard to resist the urge to liquidate investments before things get worse. But that’s possibly the worst mistake you could make during a stock market correction.
Once you sell off stocks when they’re down, that’s it — you’ve locked in your loss and can’t get your money back. And while it is possible to use capital losses in your portfolio to your advantage, you’re probably better off avoiding them in the first place.
So to that end, pledge to leave your portfolio untouched until the market improves. In fact, stop checking your balance altogether if you’re not planning to use your portfolio as a primary income source for years. Seeing those dismal numbers on screen will only mess with your wellbeing and potentially tempt you to make rash decisions that hurt you financially, so why put yourself in that position?
2. Shore up your emergency fund
You may not want to tap your portfolio when stock values are down. But what if an unplanned expense arises while stocks are stuck in correction territory? In that scenario, losses may be inevitable.
That’s why it’s so important to boost your emergency fund right about now. Ideally, you should have enough money in savings to cover at least three full months of essential living expenses. If you haven’t hit that target, cut back on spending, pick up a side hustle, bank your tax refund, or do whatever it takes to shore up your emergency savings so you’re not forced to unload investments at the worst possible time.
3. Diversify your assets
A diverse portfolio can help you better weather a storm like the one we seem to be trapped in. If your portfolio isn’t as diverse as it could be, you may want to add some investments that lend to a more robust mix. (In this case, you can violate that “don’t check your portfolio” rule, but briefly.)
One easy option for diversifying is to load up on S&P 500 ETFs. The great thing about ETFs is that they allow you to own a whole group of stocks with a single investment. And so if you feel your portfolio is lacking in tech stocks, for example, you could simply add shares of an S&P 500 ETF rather than take the risk of buying a single tech stock that may or may not underperform.
It’s hard to stay calm and focused during a stock market correction. This holds true whether you’re a new investor or a seasoned one. But remember, stock market corrections are actually pretty common, so do your best not to let the current one get you down. Instead, employ these tips to protect yourself while we ride out this wave.
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