When it comes to investing, it’s difficult to know what to do during tough times. However, when investing during tough times, sometimes it’s a good idea to keep the basics in mind.
Whether you’re facing a recession caused by a global pandemic, or whether you’re having a personal financial emergency, there are a few things to keep in mind.
1. Don’t Panic
The first thing to keep in mind when investing during tough times is to avoid panic. When stocks are dropping doing to market forces, or when you’re running out of money in your emergency fund, it might feel like you need to make choices now.
However, choices made during a panic can result in devastating consequences. Even if you ultimately decide you need to sell some of your investments for a loss, don’t panic and completely wipe out your portfolio.
Step back, review your goals, and figure out where you stand. Try to make your choices based on careful thought, rather than panicking. Don’t stop your investing plan due to panic, and don’t make other decisions based on fear.
2. Stick With Dollar-Cost Averaging if That’s Your Plan
If your long-term investing plan includes dollar-cost averaging, stick with that, even during tough times. It might feel painful to keep putting money into the market when things look rough, but the reality is that it can help you keep going.
Indeed, if you’re dollar-cost averaging and the market is down, you might actually get more shares for less, helping you in the future. Even if the market isn’t dropping, sticking with your plan can help you keep building your portfolio. There’s a reason you put together a specific investing plan, and now is not the time to abandon it, just because things are difficult.
3. Don’t Try to Time the Market
When investing during tough times, it’s tempting to try to time the market. Maybe you want to try to score some good bargains. Maybe you hold off your regular investing schedule in the hopes that a big crash will allow you to get a good deal somewhere.
Realize, though, that this might not always work. Maybe you end up with an opportunity cost problem because you kept your money in cash too long. Perhaps the market is disconnected from the underlying fundamentals of the economy, and it doesn’t crash as expected.
There’s a lot that can go wrong anytime you try to time the market. While you might have a little extra cash to take advantage of opportunities, don’t work to actively time the market. In the end, sticking with your investing plan and continuing with your dollar-cost averaging efforts are likely to help you long term, especially if you’re a beginner and just learning the ropes.
4. Consider Tax Loss Harvesting
While you don’t want to sell just to sell, there are times you might need to unload some losing investments. When investing during tough times, you might find an opportunity to do some tax loss harvesting.
If you need the money for an emergency, or for some other reason, and you decide to sell an investment, consider looking for something that’s lost money. When you sell at a loss, you have the opportunity to deduct the loss from your taxable income. This can reduce your tax bill, which can be helpful during a difficult time.
With tax loss harvesting, you still get the cash you need, but it also serves an additional purpose. When selling any investment, though, it’s important to carefully consider the decision and make sure you’re not jeopardizing your overall investing plan.
5. Know When You Need to Tweak Your Plan
Sometimes, when investing during tough times, you do need to tweak your plan. If you’ve experienced a job loss, you probably can’t keep putting the same amount of money into your investments each month. You might need to temporarily pause your contributions.
In some cases, you might even need to tap into your investments and liquidate some of them to help you cover costs. However, this shouldn’t be done as a knee-jerk reaction. Instead, carefully consider your options and weigh your other resources.
While you might have to stop contributing to investment accounts, you might not need to withdraw money. Perhaps you can apply for unemployment benefits and get a little help from the local food basket. There are resources out there designed to help with hardship. Before you raid your investment accounts, see if you can make your other resources stretch so you aren’t paying an opportunity cost.
Investing during tough times is always a bit of a balancing act. If you approach the matter carefully and thoughtfully, you should be able to keep your finances — and your portfolio — mostly intact.