Gary Cohn aside, there is going to be another market correction (or crash) at some point, and you’ll want to be prepared when it happens.
“No matter how old you are, market corrections and market declines are a part of the overall ecosystem of the markets, that’s just the way it works,” says Sean O’Hara, president of Pacer ETFs. “Go in with open eyes.”
Here’s what to know.
If you’re under 60…
You’re ok. “The younger you are the less concerned you probably need to be about it,” says O’Hara.
In fact, you can think about it like you’re getting stocks on sale. You want to get them at lower prices, particularly if you’re automatically investing through a workplace retirement account that you’re not actively managing. “When something else we want goes on sale, we get excited, but when stocks go down we think it’s bad,” he says. “These short term declines should be viewed as opportunities.”
If you’re young and investing primarily through a 401(k), don’t think about it like a trading account that’s losing money, suggests Kevin Dixon, senior market analyst at Market Traders Institute. Think of it as your nest egg that leverages dips to buy cheaper stock. “You’re using the concept of cost averaging,” says Dixon. “You’re buying on the way up and on the way down.”
Historically, bear markets last under two years, while bulls run much longer. “If the market starts crashing, that volatility is opportunity that you only get once every seven to 10 years,” says Dixon.
Focus on what you can control. Make sure you’re on track to pay down debt and build your emergency fund, says Andrea Coombes, Nerdwallet’s investing and retirement specialist, and then focus on your investing goals. “If retirement is a couple decades or more away, then consider harnessing the power of long-term market growth to help you reach that goal,” she says.
Above all us, don’t let your emotions affect your decision making.
“There’s no way for us to separate our humanity from our behaviors, we all have emotions, we all get afraid and there’s no getting around it,”says O’Hara. “If you let fear drive you, you’ll make bad decisions.”
If you’re near retirement…
This is where things get trickier. If you’re around 60 or aiming to retire in the next five years, “What really gets people into trouble is taking an income during these bear market scenarios,” says O’Hara.
“If you are few years out from retirement, you should be reasonably close to your retirement savings goals,” adds Michael Dinich, a retirement planner at Your Money Matters. “At this point it is more important not to lose money than it is to get the highest return possible.”
So consider the liquidity of your money, says Doug Andrew, the author of Last Chance Millionaire and Millionaire by 30. You want to be able to get to it when you need it most.
“Can you access your money when you need it in a short period of time, with an electronic funds transfer or with a phone call?” says Andrew. “Too many investors put liquidity behind rate of return, even third or fourth down the list. I say it’s number one.”
So think about tweaking your asset allocation and look into alternatives, like dividend vehicles. One of Dixon’s favorites: REITs (real estate investment trust). “You can make monthly dividends and make income while the markets are doing what they’re going to do,” he says. “Dividend income is smart. You can diversify your portfolio and know you’re going to get paid just for owning stocks.”
And don’t forget about your foreign stock holdings. “There’s not just one market for stocks, so some of the better opportunities to invest in equities might be outside the U.S.,” says O’Hara. “Perhaps you take a look at your portfolio and ask yourself if you have enough money outside of the U.S. Are you working enough to lower your risk?”
That said, the old-school asset allocation equation (110 or 100 minus your age equals the percentage of your portfolio you should have in stocks) may be out of date, says O’Hara. People are living longer, which means you could have 20 to 25 (or more) years in retirement. You don’t want to run out of money because you didn’t have high enough returns.
Use this as an opportunity to take a look at your overall financial plan and shorter-term investing goals. “If you’re investing for a short-term goal, it might be time to start exiting the stock market—generally, you don’t want to invest money in stocks if you’re going to need the money in three years or less,” says Nerdwallet’s Coombes. For more info, check out this article.