Two weeks ago, my net worth plummeted.
I was sitting in an all-day meeting when the stock market news broke. Everyone in the room began frantically checking their investments to find they were down hundreds or even thousands of dollars. I opened my phone and saw my investments had dropped by tens of thousands.
As a self-made millionaire and personal finance coach who's significantly grown her investments through the stock market, you'd probably think this sent me into a downward spiral.
It didn't. Anxiety flooded the room, but as a longterm investor who's seen the market rise and fall for decades, I wasn't worried. I didn't make any rash moves because I knew my investment strategy was solid, even when my stocks plunged.
In times of market volatility and economic uncertainty, it's easy to get caught up in fear and start questioning every investment decision you've made. But panic is not your friend when it comes to investing. If you're worried about your retirement savings, index funds or other investments, here's how you can remain confident and keep your cool.
What happened with the stock market this month?
On Aug. 5, the stock market experienced its worst day in nearly two years, falling by 3%. The Dow Jones, a stock index which contains stocks from 30 of the most prominent companies on the market, dropped over 1,000 points.
The Nasdaq Composite, another key stock index that includes tech stocks like Apple, Microsoft and Alphabet (Google's parent company), also fell by 3.5%.
The early-August stock plunge was the result of a global market sell-off, sparked by a poor jobs report. Fears of a recession led to a meltdown in the market, but by the end of the week, it had almost fully rebounded.
Why I wasn't worried about my money
Market volatility can be scary, but it's also normal. That's why I teach my clients to build a solid investment strategy that can weather turbulent stock market storms. Here are some pointers to help you avoid panic the next time the market takes a dive.
1. Invest for the longterm
The stock market can be a powerful tool for building wealth, but it's not a guaranteed way to make money, particularly if you're investing all of your money directly in stocks or for short-term goals.
I only invest money that I can afford to loseand let grow for at least 10 years or more. That's why the bulk of my investments are in tax-advantaged retirement accounts like our 401(k) account. The potential of early withdrawal penalties reminds me that the money is only intended to be pulled out later in retirement.
How can you make sure your investments are diversified enough to survive market crashes? I'm glad you asked. Here are three habits I adapted to help me keep my cool and hold on to my investments when the market dips.
If you're retiring soon and worried about your investments dropping, I recommend reviewing your portfolio with an experienced financial advisor.Work together to determine your retirement timeline and risk tolerance so you can figure out the next steps for your money.
2. Keep a month of expenses in your checking account
You need enough money to pay your regular monthly bills before investing in the stock market. That's why I have my cash flow cushion -- one month's worth of living expenses -- in my regular checking account where I typically pay my bills.
This cushion guarantees me easy access to cash for everyday expenses without needing to dip into my savings or investments. If you don't have this cushion already, I highly recommend you build this into your financial plan. Start by adding up your monthly expenses and work toward saving up to this number over time.
3. Create a 'stuff happens' fund to withstand market dips
In addition to my cash flow cushion, I stash at least one more month's worth of expenses in a high-yield savings account. Rather than referring to this as an emergency fund, I call it my 'stuff happens' fund, because accessing this financial safety net doesn't have to be a life-or-death event, like a job loss.
For example, last month I spoke at my first TEDx -- which is an unpaid speaking event, but a great opportunity to build my skills and network. So I pulled funds from my "stuff happens" account to make the last-minute travel arrangements happen.
If you don't have any debt, bumping this up to three months or more will give you more runway to make investment decisions calmly.
4. Use the dollar-cost average strategy, no matter what
One of the best strategies for anxiety-prone people like me to hedge against market volatility is dollar-cost averaging. Dollar-cost averaging is like buying your favorite candy with your allowance. Instead of spending all your money at once, you buy a little bit of candy every week at a fixed price, say $50. Some weeks, the candy costs more, and other times it's less. The goal is to spread out your purchases over time so you end up with more candy when it's cheaper and less when it's more expensive. This way, over time, you get the most candy for your money without worrying about when to buy.
Over time, this strategy can lower the average cost of your investments and take the guesswork out of trying to time the market -- something even experts struggle to do. I made that mistake before, and I learned the hard way not to do it again.
Now, my husband and I maximize our individual retirement accounts and 401(k)s every year by investing the same amount at regular intervals. My husband makes investments semimonthly, and I do so monthly as a business owner. We're both contributing the maximum IRS limit for this year, which is $23,000 each. By investing a fixed amount regularly, you buy more shares when prices are low and fewer when prices are high.
5. Stay informed, not overwhelmed
It's important to stay informed about the market, but there's a fine line between staying informed and becoming overwhelmed. Choose reliable sources of information and avoid sensationalist news that thrives on fear. I don't talk about money with other investors who thrive on drama. I also recommend reviewing your investments monthly or quarterly, not daily or weekly. I only look at my investments when I'm in a calm state of mind during my monthly budgeting routine.
Before you rush into fear-based market moves, make sure you have a strong financial foundation: cash stashed in savings, reduced dependency on debt and a budget routine that works for you in both good times and bad. When these are in place, you can weather the market's inevitable ups and downs with confidence rather than fear.
