It’s easy to get anxious as stock prices swing wildly, especially if you plan on withdrawing from your retirement portfolio in the next few years. These moments of panic can lead to emotional investing, like selling stocks too early or waiting so long on the sidelines that you invest during a market high.
A strong investing plan can help you avoid emotional investing and outsmart market anxiety. Here are four steps to take.
1. Have a cash buffer
Anxiety can be heightened if the money that you’re investing is money you’ll need in the short term, since that short time horizon means you might need to sell investments at an inopportune time. Investors who don’t have to sell their stocks for at least five years will have an easier time navigating sharp volatility than someone who doesn’t have enough cash reserves to pay for their essentials and short-term goals.
Financial advisors recommend building an emergency fund that can cover at least three to six months of your living expenses. However, retirees and people with inconsistent income may want to save more, like enough to cover one to three years of living expenses. That way, you have the money readily available to pay for a surprise bill or cover your needs if you lose your job. You can put this cash into a high-yield savings account so it earns interest.
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2. Automate
Investing doesn’t have to entail analyzing individual stocks and trying to determine which one will be the next to soar. In fact, investing in broadly-diversified index funds and exchange-traded funds (ETFs) is often a simpler and more effective option, and setting up automatic investments into these funds makes the process even easier. Automated investments let your brokerage firm pull money from your bank account and put it into the funds. You get to choose how much to automatically contribute.
Automated investing lets you spend less time studying your portfolio while still benefiting from compound growth. When stocks go down, automatic investing ensures that you are buying shares at a discount — even if the state of the market has you feeling anxious. Then, you have more exposure to the stock market when a rebound takes place.
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3. Rebalance regularly
An important part of investing is maintaining a diversified portfolio. That means allocating your money to various types of assets — like stocks and bonds — as well as assets of different sizes and those that are both international and domestic. That way, parts of your portfolio will be able to hold steady or even outperform when other areas suffer from a downturn.
But just because your portfolio is well-diversified doesn’t mean it will stay that way. You need to regularly, like quarterly or annually, check in on your portfolio to ensure no one area is taking up too much of your portfolio. If your allocation to technology stocks, for example, has ballooned but your international stock allocation has shrunk, you may want to sell some tech stocks and buy more international stocks (or funds that include these stocks). Regularly rebalancing your portfolio can help mitigate risk during market ups and downs.
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4. Take a break from headlines
Just because the news is pointing out a 2% drop in the S&P 500 doesn’t mean you should panic. But that’s easier said than done.
If you find that you’re susceptible to market panic based on headlines, take a break from reading investment news and focus on the long term. Logging out of your brokerage account during corrections, especially if you’ve implemented automatic investments, can help you avoid panicking.
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