Stocks’ roller-coaster ride this week is just as much as any market-watcher can stomach. It’s been two years since the last bile-inducing sell-off during this nine-year bull-run and investors have become unaccustomed to wild swings.
While there are no indications that this stock market swoon will last unabated or is a harbinger for an economic downturn, it does appear market volatility, at the very least, may be back. Here’s what happened and how you can respond to that uncertainty, so you can sleep soundly.
What just happened?
An impressive jobs report last week showing higher-than-expected wage growth stoked fears of inflation. Coming tax cuts—expected to supercharge the economy—only added to that fire. It dawned on investors that the Federal Reserve, in order to stave off rampant inflation, may accelerate increases of the fed funds rate. That, in turn, will make it more expensive for businesses and Americans to borrow money, squeezing company profit margins and crimping consumer spending power. The result? A sell-off in stocks.
Your first move: Do nothing.
On Monday, when the Dow tumbled by a record-setting 1,175 points, panic ensued. The websites for robo-advisors Betterment and Wealthfront crashed as investors clamored to log into their investment accounts. Trading activity in 401(k)s was almost 12 times the normal level and highest since August 2011, according to Alight Solutions. It’s likely Thursday—when stocks dropped by more than 4%—saw similar frenzy.
But for many investors, it’s better to ignore the news. Young investors should stay the course, contributing to their retirement plans as usual or even more, says Byke Sestok, president of Rightirement Wealth Partners in White Plains, New York. Their retirement is 20 to 30 years away, so they have plenty of time to recover any recent losses and add gains. One silver lining: If stock values are lower, their investment dollars can buy more for less, and reap bigger gains later when the market reverses.
Those approaching retirement—maybe three to four years from their golden years—may want to revisit their portfolio to make sure their asset allocation will protect their nest eggs. In general, they should have more, less-risky assets than risky ones. Ask a professional if you’re not comfortable doing this yourself.
Pay down high-cost debt.
Americans have been aggressively taking on debt during the stock market’s heady run during the last two years. As of December, Americans were carrying $1.028 trillion in revolving debt—largely credit card debt—a high-water mark. Auto-loan and student-loan debt has also been on the rise.
But rolling credit card debt is more concerning because those interest rates are directly tied to the fed rate, the one that may be increasing faster than expected. That means any balances you carry are going to become even more expensive as interest charges increase. It’s time to wipe out that debt.
You have a few options. Throw any and all additional cash at the balance, including your tax refund. If that doesn’t eliminate it, you could also try a personal loan or HELOC—more on that here. If you have good credit, consider a balance transfer card that offers zero interest for an introductory period, usually between 12 and 18 months, so your balance doesn’t grow. Direct any extra funds from raises, bonuses, birthday money—you name it—to paying off that card before the intro period expires. And most important: Suppress the impulse to add new purchases to any credit cards.
Pump up savings.
While Americans have welcomed new debt, they have shied away from saving. The savings rate dropped to 2.4% in December, the lowest level in 12 years and down from 5.8% two years before. A stock market correction may be the wake-up call you need to reevaluate your financial security.
Do you have enough in liquid savings to cover an unexpected event, such as a pesky car repair or something more serious like a job loss or medical leave? Financial experts advise socking away at least six months of living expenses (housing, car payment, any debt payments, groceries, etc.) for a rainy day.
“[Emergency savings] give people peace of mind to continue and invest for their longer term goals, and stay invested during times of market volatility,” says Todd Youngdahl, managing partner at Washington Wealth Advisors in Falls Church, Virginia. Start by using your tax refund to pad your savings. If you’re investing every month, but have no savings, put those dollars toward bulking up your savings. You can lower contributions to retirement accounts to do this.
Consider sticking these funds in an online savings account. You can compare savings accounts here. These typically offer higher yields than accounts at traditional brick-and-mortar banks. Another bonus? The rates on these accounts will increase as the Fed raises its benchmark rate—the one causing consternation among investors—meaning you’ll earn more on every dollar you save.
