The stock market has many Americans feeling rattled about the future, as prices continue to sink. The Nasdaq Composite fell into correction territory this week, while the S&P 500 inches closer by the day.
Amid all of this uncertainty, many workers may be wondering where their financial priorities should lie. Is it really safe to contribute to your retirement fund when the market is quickly losing value? Or should you stash your cash elsewhere until stocks stabilize? Here’s what you need to know right now.
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Your first step when the market dips
When stocks begin to take a turn for the worse, one of the first financial moves to make is set aside some cash in an emergency fund. Ideally, you should aim to have enough savings to cover around three to six months’ worth of everyday expenses — but even a small amount can be helpful.
Having cash that’s readily available can help you avoid dipping into your retirement fund at a less-than-ideal time. Withdrawing from your 401(k) or traditional IRA before age 59 1/2 will generally result in a 10% penalty along with income taxes on the amount you withdraw.
Pulling money from your retirement fund during a market downturn can be especially costly, though. If you withdraw your savings after stock prices have dropped, you could end up selling your investments for less than you paid for them. In some cases, that could amount to thousands of dollars in losses.
It pays to continue investing
Once you have at least some cash stashed in an emergency fund, it can be smart to keep investing in your retirement account regularly. While it may sound counterintuitive, staying in the market even when stocks are plummeting can pay off down the road.
When the stock market drops, you can get more for your money when investing. Falling stock prices mean that the market is essentially on clearance, allowing you to invest in the same stocks or funds at a fraction of the cost.
Even if you’re contributing to a 401(k) or IRA rather than investing in individual stocks, the funds you’re buying through your account may be priced lower now than they were even a few weeks ago — giving you more bang for your buck. Buying at lower prices can also set you up for significant gains when the market inevitably recovers.
Just be aware that it can sometimes take years for the market to fully rebound, and your nest egg may lose value in the short term if the market continues to fall. It’s more important than ever, then, to keep a long-term outlook right now.
Check your asset allocation
Your asset allocation is how your investments are divided within your portfolio. Most people invest in a mix of stocks and bonds, with stocks being higher risk and bonds being more conservative.
Stocks generally see higher average returns over time, making them fantastic for building wealth. However, they’re also often hit much harder during periods of market volatility. For that reason, most people will want to gradually shift their portfolio toward the conservative side as they get closer to retirement.
That said, you may still aim to invest at least some money in stocks even if you’re close to retirement. Your nest egg will continue to grow even after you retire, and if you invest solely in bonds, it will be more difficult for your retirement savings to last for decades.
While your exact asset allocation will depend on your timeline and risk tolerance, a common guideline is to subtract your age from 110. The result is the percentage of your portfolio you might allocate to stocks. If you’re 65 years old, for example, you might devote 45% of your retirement fund to stocks with the remaining 55% to bonds. This can help protect your savings during market slumps while still setting yourself up for long-term growth.
The market may be daunting right now, but a little preparation can go a long way. By building up some emergency savings, checking that your asset allocation is right for your age, and continuing to invest whatever you can afford, you’re far more likely to thrive no matter what the future holds.
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