Even if you don’t spend your time reading The Wall Street Journal or watching CNBC, you’ve probably heard that the last few weeks have seen some big drops in the stock market. “Over time, there are always going to be ups and downs in the market, but if you are putting money in every month, you shouldn’t be overly concerned with near-term or even medium-term volatility. The time is your friend!” says Karolina Decker, Founder and CEO of FinMarie.
Here’s what you need to know about a stock market downturn:
- Diversification of the investment portfolio – do not put all eggs in one basket! Different companies, sectors and asset classes – this is what a well-diversified portfolio should look like to avoid large losses.
If you don’t need to touch your investments for five or 10 years or more, you’ve got plenty of time to ride out this market downturn. Still, this might be a good opportunity to take a look at your investments and rebalance your portfolio if the recent volatility has thrown your asset allocation out of whack.
- Invest only your surplus
Each investment involves the risk of loss, so do not start investing your basic income. First, put away the emergency fund – a minimum of 3-months of your monthly netto salary. Only with surplus you can start investing.
You should also sit down with a financial planner to have her run the numbers to make sure that you’re on target for your saving plan and that your asset allocation makes sense.
- Set the goal and investment strategy
The strategy needs to be adjusted to your goal. If your goal is long-term, it is worth adding “milestones” i.e. intermediate goals. As part of the strategy, you need to determine in what markets you operate, how you analyze the market, how much time do you want to spend on active investment management. Remember, if the chosen strategy does not meet objectives, then something is wrong with the strategy or goal.
Give your investment a chance. Most of the time your investment will change very slightly, on some days it will lose value. Remember that the further the investment horizon, the more profitable it becomes to take the risk .
The best way to make sure that you’re able to purchase stocks when they’re at their lowest point is to consistently invest: Set up an saving plan, and you won’t have to worry about what the stock markets doing, or take the chance that you’ll forget to contribute.
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