- Since investing in the stock market is always risky, a downturn is only bad if you need your money soon. This is why you shouldn’t buy stocks with money you’ll need in the next couple of years.
- Be careful to not let your fear of regretting a decision paralyze you. This is when you don't invest because you are afraid of buying at the top and losing money. And then when the market goes up without you, you end up feeling like kicking yourself.
The stock market crash in March scared many, myself included. A couple of weeks later, I started wondering about when to get back into investing as I was scared of missing the rebound. Maybe you’re in the same boat, sitting on cash and worried about missing out on the recovery in stock prices over the next few weeks. In any case, how do you get back into the stock market and not miss out on the recovery?
First, always remember that timing the market is never a good idea. I promise, if you can find someone who can perfectly time the stock market, then you’ve found yourself a billionaire.
First thing to remember is, since investing in the stock market is always risky, a downturn is only bad if you need your money soon. This is why you shouldn’t buy stocks with money you’ll need in the next couple of years. In any case, if you do want to get back into the market, consider doing the following.
Boost Your Emergency Fund
Perhaps one of the most important rules of investing is to never use money you need for living expenses. To avoid feeling as though your financial future is going down the drain, keep enough money in an emergency fund. If you anticipate needing that money in two years or less, then a better alternative would be putting it in money markets or CDs that you can draw on. It’s easier to relax and let your long-term investing work when you know that your cash needs are taken care of in the short-term.
Set Your Allocation
Before you can even start investing, make sure you figure out how much of your portfolio you want in stocks under “normal” conditions. Your allocation would probably depend on your investing goal and age. Setting a baseline would help you avoid making panic decisions.
Have a Solid Plan
A stable financial plan will take stock market volatility into account. Regardless of whether you’re a novice or expert, understanding your emotional fortitude, investing objectives and time horizon will help shape the plan.
Investing should not be emotional. It should be very rational and it should key off of a financial plan.
There are plenty of ways of investing and many investing theories. Finding one that suits you and sticking with it is the key to making your plan work.
Remember Your Risk Tolerance
You have to realize that investing in the stock market is inherently risky. What makes winning long-term returns is being able to ride out the unpleasantness and remain invested for the eventual recovery. If you’re the type to panic during times of stock market volatility, it won’t matter if you can double or triple your money in a particular holding because you won’t make it to the end — at least not with your sanity intact. A financial plan only works when you can stick with it. You can do that if you know how much volatility you’re willing to stomach in exchange for higher potential returns.
Be careful to not let your fear of regretting a decision paralyze you. This is when you don’t invest because you are afraid of buying at the top and losing money. And then when the market goes up without you, you end up feeling like kicking yourself. The best way to deal with this is to average your positions over time. Rather than trying to time the market, just buy in at a range of different price points. You can do this by investing equal dollar amounts in the market at regular intervals of time.
Don’t Forget About Stop-Loss Orders
If you buy individual stocks or ETFs, you can put a stop-loss avoid losing a lot of money. A stop-loss order is placed with your brokerage to buy or sell once the stock reaches a certain price. For example, if you set a stop-loss order for 10% below the price at which you bought the stock, it will limit your loss to 10%. A stop-loss order would be a good way to mitigate the downside when the stock market does down.