Now, unless these stocks are sold, no one is truly “losing” money yet in the long term, because there is still potential for the market to recover in time to come. This also isn’t the first time the stock market has taken a hit—look back on the 2008 financial crisis, or even more recently, the beginning of the pandemic in March 2020. Eventually the market bounced back up, though it did take some time.
Here are three ways to ride out the stock market downswing, and hopefully we’ll come back on top one day. The act of riding out the stock market downswing—much of it is psychological, and managing how you think and approach money will help to benefit you in the long term.
1. Build a “Stability Fund” and Don’t Think of It as an “Emergency Fund”
Technically, both “stability fund” and “emergency fund” refer to the same thing, where you keep a couple months’ worth of expenses untouched and uninvested.
However, I personally much prefer the use of the term “stability fund” rather than “emergency fund”—I find the term “emergency fund” rather dangerous, especially for new everyday investors. This is because the term “emergency fund” does not capture the true potential of what the fund can actually do, and it can lead new everyday investors to have any of the following mindsets:
- They are losing money if they are leaving tens of thousands of dollars uninvested in their bank accounts
- They don’t expect any emergencies, so it’s better to invest the money and let it grow
- They can tap into a line of credit or use credit cards for emergencies
None of the above are really inaccurate per se, but the rebuttal to the above points is that: by having a fund, say, $20,000 that is untouched and uninvested, which you can access at all times, would keep you mentally grounded. Using and/or investing only the excess of what you have aside from this fund will help lace your financial decisions with more confidence and security—and this idea is much better captured by the term “stability fund” instead of “emergency fund”.
A “stability fund” also backs you mentally, allowing you to more powerfully weather the downswings in the stock market and preventing you from panic buying and panic selling.
I have written a more fleshed out post about this concept:
2. Evaluate Your Investments
Go through your existing investments in the stock market, and consider doing any of the following:
-
Leave them as they are
If you have investments in broad-market ETFs that tracks the performances of popular companies that have been around for a while, perhaps you can leave them as they are. An ETF by principle is diversified and there is a higher chance of its performance to even out in the long run although this certainly depends on the type of the ETF and the companies it tracks.
-
“Buy the dip” responsibly; don’t panic buy and leave your stability fund untouched
You might have come across the term “buy the dip”—the idea is to buy more stocks when the market turns for the worse so you’ll profit off more when it rebounds back up. While it generally makes sense, you should think twice because nobody knows exactly when the market will go back up—it could be six months from now, two years, or even five—who knows? Because it’s hard to tell what is going to happen to the economy, you may end up needing to use the money you might have otherwise used to buy the dip, and you can’t really take them out without losing money because the dip hasn’t recovered yet. So it’s best to buy the dip responsibly, don’t panic buy, and avoid touching your stability fund at all.
-
Liquidate some of your investments, but don’t panic sell
If you have any investments that aren’t really making or losing money and you are kind of ambivalent about their potential, consider liquidating them by selling them off, and cash them into your stability fund, a high-interest savings account, or a fixed deposit. A fuller stash of stability fund won’t hurt you in these times.
3. Consider Deleting Your Investment Apps and Check the Market Sparingly
If you aren’t very confident that you can mentally weather any downswing in the stock market, but you feel like you have evaluated the risk/reward of your current investments enough to leave them as they are, perhaps you can consider deleting your investment apps from your phone. These apps have made it so easy for us to obsess over the market every other day, and in these times, checking on your investments only once a month or every few months would probably benefit you when riding out the downswing in the stock market.
More Money Stuff 🇨🇦
- Beat the Bank: The Canadian Guide to Simply Successful Investing
- Tax-Free Savings Account: A Guide to TFSAs and How They Can Make You Rich
