4 stupid things to do with your money when the stock market is tanking
- Financial-market stress has reached a 12-year high in the US as coronavirus panic continues to mount.
- But the vast majority of investors should follow a few simple rules: Don't touch your investments, keep saving money, and spend within your means.
- It can be difficult to ride out the storm, but research shows that a buy-and-hold strategy - the recommended approach for most investors - is built for wild swings like this.
- If you're considering a change to your financial plan, SmartAsset's free tool can help you find a financial professional to speak with »
It's exceedingly difficult, if not impossible, to ignore coronavirus panic right now.
Coupled with global chaos from oil price wars, the US markets have plunged, dragging down the value of millions of Americans' investment portfolios in a matter of days. There's no telling where it will go from here, but experts seem sure it's going to get worse before it gets better.
The best way to safeguard your money during this grisly storm? Take a pause and stick to your long-term plan. If you suspect your long-term plan requires short-term restructuring - you're in or nearing retirement, for example - talk to a financial planner.
In the meantime, here are four things you shouldn't do when the economy tanks.
1. Stop saving money
The Federal Reserve announced an emergency interest rate cut on March 3 and it's trickling down to high-yield savings accounts. That means the APY on your savings account will probably drop about 0.50% if it hasn't already.
If you're saving for an upcoming goal, keep going. Building and maintaining an emergency fund is more important than ever. If the economy continues trending downward into recession territory, a cash reserve is the very best way to protect yourself against slipping into debt.
2. Sell off your investments
Financial-market stress is off the charts, but unless you've got cash to burn, it's best to sit tight with your current investments.
It may be tempting to ditch stocks that are losing you money, but it's not as simple as it seems. The market moves quickly and selling off investments on a whim can backfire.
Research shows that a buy-and-hold investment strategy, which is designed to withstand wide swings in the market, is the best approach for the vast majority of investors. In fact, active trading - even in a bull market - rarely produces better returns.
If your investment strategy matches your risk capacity, you shouldn't need money you have invested in the market for day-to-day living or an upcoming expense anyway.
3. Put off contributing to your 401(k)
It may seem counterintuitive to jump into a free-falling stock market, but it's actually the perfect buying opportunity, especially for young investors. If you're not yet contributing to a retirement account, don't wait.
Stocks are essentially on sale en masse right now, meaning you can buy more for less. When the market eventually recovers - because it always does - you'll see your investment balance rise with it. Stick to investments like index funds and ETFs over individual stocks, though, because diversification is still essential.
4. Spend beyond your means
We should all strive to spend less than we earn - it's the foundation for building wealth, after all. But when borrowing rates are falling, it can be tempting to take advantage of the perceived savings and shell out for major expenses that are currently "cheap."
If you can't afford to pay the mortgage on a new house (and all the costs that come with homeownership) or repay the balance on a credit card, don't spend the money.
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