1. Start building an emergency fund. Working at a small startup? Don’t count on a severance package if you’re laid off or the business goes under. That’s one reason (among many others) why it is critical to fund an emergency savings account, equivalent to 3-6 months of living expenses. Keep your emergency fund in easily accessible assets, such as cash within a savings account. Avoid putting your emergency funding within highly-volatile assets such as stocks, or those that will penalize you for removing funds early, such as retirement accounts.
2. Review the holdings in your portfolio to ensure that they align with your needs and goals. If you are holding a majority of your assets in bonds and cash equivalents, ask yourself if you’re taking enough risk to earn a modest return. If you’re holding the majority of your assets in stocks, ask yourself if you can tolerate a substantial swing in the market without making emotional (irrational) decisions. A good rule of thumb: if you can’t sleep at night because you’re worried about your portfolio, then you’ve taken on too much risk.
3. Limit how often you look at your portfolio. Unless a major life event occurs that requires a change in course (you have children; you buy a house; you get married), there is really no reason to review your portfolio holdings more than 1-2x/year—even if the market takes a turn for the worse. If you’ve already aligned your portfolio with your goals (see step #2), then you’re good to go and there is no need to constantly monitor asset changes. The high volatility of markets in the short term can cloud our judgement and scare us into making emotional, regrettable decisions.
4. Set your goals and stay the course. The hardest part about investing is often not setting the goal, but rather sticking to the goal. Particularly in times of economic turmoil, people are tempted to stray from the course when they notice that their portfolio is sliding. Remember, though, that volatility is normal and even expected. If anything, a downturn in the market might be a good time buy more if the assets are cheap! Buy low, sell high.
Haven’t created an emergency fund or don’t yet have a portfolio? Today’s technological advancements have made saving and investing for the masses easier than ever. New sites like Betterment.com or Wealthfront.com have also made creating a portfolio easier than ever. These so-called “robo-advisors” help you choose appropriate investments based on your risk tolerance, goals, age, and income.
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