Despite a recent uptick, the stock market remains below its all-time highs. With wars in both Europe and the Middle East, inflation remaining stubbornly above the Federal Reserve's target, and some negative recent earnings news, investors have good reason to be nervous.
All that uncertainty raises a very important question: When will the stock market hit bottom? The reality is that is a very difficult question to answer, and nobody knows for certain. Instead, here's a better question to ask: How can you stay invested when the market is jittery? These three strategies can help you stay invested as the market moves through its typical ups and downs.
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1. Invest based on when you will need the money
As a general rule of thumb, it makes sense to bucket your savings into three time periods:
- Money you could need at any time, but you're not sure when (emergency funds)
- Money you expect you will need to spend within the next five or so years
- Money you won't need for more than five years
Money you have socked away for emergencies should be held in cold, hard cash in something like an FDIC-insured savings account. While that money is likely to lose ground to inflation over time after taxes, there's a very high likelihood it will simply be there when (not if) you need it.
Money you expect to spend within the next five or so years can be invested in things like CDs, Treasuries, or diversified investment-grade bonds scheduled to mature just before you need the money. Those types of assets may deliver better returns than cash, while still providing better assurances than most stocks that the money you expect to have will be there when you need it. This type of investment may actually hold up vs. inflation, but it is not likely to actively build you wealth.
Only money that you won't need to spend for at least five years should potentially be invested in the stock market. While the stock market may enable you to build wealth over time, its frequent ups and downs make it a terrible place to stick money you need to spend in the near term.
By segmenting your savings based on your time frame like this, it becomes much easier to hold on through the normal volatility of the stock market.
2. Only invest after your debts are under control
Paying down debt has a guaranteed rate of return associated with it -- the interest rate on the debt. Paying off a debt also brings with it a guaranteed cash-flow benefit, in that once it's paid off, you can keep all of the money you had been paying toward it.
On the flip side, investing in stocks never provides a guaranteed return. Indeed, you can even lose money on your investments. That reality makes it important that your own financial house is in order before you even begin to invest.
While you don't have to be completely debt-free, the debts you may be able to keep around while investing should have all three of the following characteristics:
- Low interest rate -- either interest-free or low single digit rates
- Reasonable payment levels -- small enough that you can make the payments without undue burden on your overall lifestyle
- Clear purpose for your future -- like the ability to get to work or have a place to live
That last point needs a bit more explanation. Investing can be an emotional roller coaster, especially when the market moves against you. One of the toughest things to do is hold on to what could ultimately be a great investment over the long haul when in the short term, it looks like it is worth less than you paid for it.
That emotional roller coaster makes it tempting to sell low in order to pay off your debt, turning what could have been a temporary decline in value into a permanent loss of capital. By only holding on to debts that you can link to a clear purpose for your future, it becomes much more feasible to make long-term smart decisions even when the short term looks rough.
3. Recognize that a share of stock is an ownership stake in a business
When all is said and done, when you own a share of stock, you own a stake in the business that issued that stock. While the stock market can force its price to fluctuate wildly day by day, the underlying company can more clearly peg its true worth to its ability to generate cash over time.
A company's long-term generating ability generally won't change all that much based on the short-term whims of the market. By focusing on that long-term potential rather than the short-term price fluctuations, it gets easier to make buy, sell, or hold decisions based on the company's prospects.
While that won't guarantee that your stock investments will make money, it can help you stay invested in ultimately strong companies even while their stock prices are down.
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The massive uncertainty we're facing at the moment isn't likely to go away anytime soon. The market will continue to be volatile. If you're getting that pit in your stomach and are worried about your investments, then now is the perfect time to take advantage of these three strategies.
The reality is that your guess is at least as good as mine is as to when the market will bottom out. By making today the day you set yourself up to stay invested even when the market is jittery, you'll get one step closer to being able to make it through some seriously volatile times.
