3 smart moves to make in your brokerage account while stocks are falling
Take advantage of these tips now.
- In today’s market environment, there are steps long-term investors can take to set themselves up for success.
- Doing these things well in a bear market can help you build long-term wealth, avoid rash decisions, and ensure your investment strategy stays on track.
The stock market is down significantly from its 2021 highs, and it can certainly be a scary time for investors. However, there are some steps you can take in today’s turbulent stock market environment to help prepare you for future success. Here are three examples.
1. Contribute enough to your retirement account
Experts generally suggest that Americans should aim to put about 10% of their salary into retirement accounts, and that’s not including any employer matching contributions. Most people don’t even come close to that — the average 401(k) contribution is about 7% of salary, according to Vanguard. And many people simply contribute enough to take advantage of their employer’s match (usually around 3% to 5%).
If you’re not saving enough, it may be time to increase your retirement contributions. Not only will you be putting more money aside for your future, but you’ll be doing it at a time when the market is down, which has always been a good time to invest.
If 10% seems like too much, you don’t need to go for it right away. Even setting aside an extra 1% of your income in your 401(k) or IRA can make a big difference in the long run.
2. Perform a balance exercise
If you invest through a robo-advisor or your own target date retirement funds, rebalancing is something that happens automatically. But most people need to do this manually from time to time, and it’s especially important to check after the market has risen or fallen sharply.
If you’re unfamiliar, rebalancing involves the strategic buying and selling of assets to ensure your investment strategy is still in place.
Here is a simplified example. Let’s say you determine that an asset mix of 70% stocks and 30% bonds is the right mix of assets for you. Now suppose you have set up your portfolio this way and your stocks have fallen 50% in total since then, while the value of your bonds has remained the same. To use round numbers, let’s say you started with $70,000 in stocks and $30,000 in bonds. You now have $35,000 in stocks and $30,000 in bonds. Your 70/30 split suddenly became about 54% stocks and 46% bonds. In this case, rebalancing would involve selling some of your bonds and redeploying that capital into stocks to bring your allocation back to the desired level of 70/30.
3. Sometimes doing nothing
Finally, as a Certified Financial Planner, I can tell you from experience that the smartest decision many people can make in turbulent market environments is to stop looking at your brokerage account.
To be sure, it’s a good idea to have a general idea of what’s going on with the stock market and your investments. After all, checking once in a while can let you know if you need to rebalance, as mentioned earlier, and can be especially good if you’re approaching retirement age.
However, far too many people check their brokerage accounts, 401(k), and other investments too often. And watching your account value plummet triggers an emotional reaction that can lead to rash decisions. Dalbar’s quantitative analysis of investor behavior found that the average equity fund investor has significantly underperformed the market over the past 30 years, and one of the main reasons is over-trading.
It’s common knowledge that the primary goal of investing is to buy low and sell high, but our emotions drive us to want to do the exact opposite, especially when stocks are falling. We see the value of our portfolio dropping and our gut tells us to “get out before it gets any worse”. From a long-term perspective, this is never a good idea, and the best way to avoid knee-jerk reactions is to stop checking your accounts every day.
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