The S&P 500 just entered a bear market for the second time in 2 1/2 years. With many stocks seeing much larger declines than the 21% drop in the index, it’s been hard for investors to feel confident about putting more money to work in the market.
As hard as it is to see newly purchased stocks immediately drop in value, there’s no alternative to sticking to a smart long-term investing plan if you want to reach your financial goals. To make it easier to stay the course, though, this list of three things you can do should help give you some perspective and make you feel better about continuing to invest.
1. Dollar-cost average with index funds
The simplest way to stick with a long-term investing plan is to put it on autopilot. A lot of investors do this by setting a specific dollar amount to take from each paycheck or from their bank accounts every month. That savings can then go to a brokerage account or mutual fund company for investment.
The best thing about consistently adding money to an investment account is that you benefit from the resulting dollar-cost averaging. With dollar-cost averaging, you invest the same amount of money each month. As a result, you’ll buy more shares in months when share prices are low and fewer shares when prices are high. In markets with a lot of ups and downs, you can end up with a better return from using dollar-cost averaging than you would if you made just one big investment in a single lump.
Dollar-cost averaging works especially well with index mutual funds because they’re set up to take any amount of money and offer fractional shares down to a thousandth of a share. However, many brokers now offer fractional shares on other investments, so you can consider the strategy with any investment you see as having great long-term potential.
2. Break up individual stock buys in multiple chunks
Many investors have been saving up cash to invest but are not comfortable putting it all to work right now. The fear? Guess wrong, and you could see big losses if the market keeps declining. But if the market rises before you have a chance to invest, it can lead to missing out on strong performance.
To protect against both of these potential obstacles, one solution is to divide your cash into multiple chunks and then invest it one chunk at a time. That way, you’ll capitalize on bargain opportunities in the market right now. Yet you’ll give yourself the ability to get an even better deal with future investments if the market keeps falling from current levels.
There’s no set rule for how many chunks you should divide your money into or how long you should wait before investing each chunk. No matter what you pick, though, you’ll find that investing a bit at a time can get rid of some of the fear of seeing immediate losses in your portfolio.
3. Contribute more to retirement accounts
Lastly, if you’re nervous about the market, a great way to get some extra bang for your buck is to boost your savings dedicated toward retirement accounts. If you can add an extra percentage point or two of your paycheck toward your 401(k) at work or put an extra $100 a month into an IRA, it can give you more capacity to take advantage of opportunities to invest right now.
Depending on which type of account you use, adding to retirement accounts can provide a little extra bonus. For 401(k) investors, if it unlocks matching contributions, that’s essentially free money in your pocket. Saving in a traditional 401(k) or IRA can also give you a tax break that increases your take-home pay, further boosting your financial situation.
It’s OK to be scared — if it doesn’t stop you from investing
If you’re nervous about the stock market, don’t feel bad — it’s completely natural. But don’t let it stop you from following your investing plan. These three action items can help you stay on track toward a prosperous future.
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