Rubina Ahmed-Haq is a finance journalist, personal finance expert, and regular contributor to RateSupermarket.ca’s MoneyWise blog.
The market headlines last month were dramatic to say the least.
Dow Jones falls 600 points and wipes out 2018 gains!
Beware: Markets have not hit rock bottom yet!
This kind of rhetoric can scare any investors into selling. It’s true, that after a 10-year bull run, financial markets around the world are starting to show some cracks. Some experts are predicting an all-out crash like the one we saw in 2008, and some are saying this is simply an expected market correction. Anyone invested in the stock market this month will be shocked when they login to see how their money is doing. Personally, my portfolio is down more than seven per cent. After almost a decade of only seeing my money go up, this surprise can be difficult to manage.
But if you’re worried right now, here are my tips on how to make sure you set up your portfolio for success, no matter what the future of the financial market holds:
Tip #1: Diversify
If you don’t already, you should aim to hold a diverse set of investments in your portfolio. This includes stocks, bonds, fixed income and cash. You can do this easily by purchasing a balanced ETF that holds a basket of these investments, or you can build your own portfolio with an asset mix that is right for you.
There is a simple formula that you can use to determine the right asset mix for your age: take your age and subtract it from 100. Whatever remains is the percentage of your portfolio that should be invested in stocks.
So if you’re 40-years-old: 100 – 40 = 60.
You should have 60 per cent of your portfolio in stocks, and the rest in more conservative investments like fixed income and cash.
Tip #2: Have a short-term plan
Look five years ahead to determine how much money you may need from your portfolio.
The closer you are to needing your money, the more conservative you’ll have to be with your investments to protect yourself from loss. Market downturns can last years, and if you need your money in the meantime, you could be left with less than you anticipated.
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Tip #3: Keep contributing
Market downturns can be a great opportunity to buy stocks on discount. Eventually, the markets will turn around and that investment you bought for next-to-nothing will have that much more room to grow. For anyone making monthly contributions into a mutual fund, for example, this can be a great opportunity to scoop up more units that you normally would. Keep your stocks on a dividend reinvestment plan, or DRIP. You will net more shares because your investments are lower when dividends are paid out. Just remember the dividend amount per share does not change unless there is an announcement.
Tip #4: Don’t stress
This can be the hardest lesson to learn. But reading the headlines and obsessing over daily market activity will not make you feel better. Markets in October suffered several triple-digit losses, but also a few triple-digital gains. If you always reacted on days when the market was down, you would lose out on the opportunity to make money when the markets eventually bounced back. To ease your mind, before jumping the gun and making the decision to sell, always check the historic return of any major index: S&P 500, Dow Jones, NASDAQ, or TSX. All will show that the 20-year trend is always higher, so if you are invested for the long term, your investment will be fine in times of downturns. You just need to stay calm, talk to your banking advisor if you’re unsure, and let the downturn run its course.