- With the markets falling, many investors are worried about an impending recession.
- According to financial planner Nicole Morong, cost averaging can save your wallet in the long run.
- She also suggests investing in I bonds, which currently have an interest rate of 9.62%.
With the S&P 500 down 8.23% and the bitcoin price down 28.93% over the past month as of this writing, investors have been worried about an upcoming
recession
.
Instead of making rash decisions during a
bear market
however, financial planner Nicole Morong of Peterkin Financial says she takes a different approach with her clients.
“Our conversations are less about how to cut right before a recession,” she says. “I’ve asked my clients, ‘Can you keep investing consistently so you can buy stocks on the sell side and take advantage of this market downturn instead of just having your nest egg disappear?'”
Instead of panicking when the market is down, here are six smart investing moves that can protect your portfolio in the long run.
1. Diversify your portfolio
Don’t put 100% of your money in one investment vehicle. Diversifying your portfolio is one of the most shared investment tips, although some people ignore it during a recession, Morong says.
“One of the most common mistakes people make is thinking they’re diversified because they own five different S&P 500 funds,” she says. “They have their Fidelity account, their Schwab account, their 401(k) — and they have an S&P 500 fund in each one. And they think because the custodian is different, they invest in different things, but really, when the S&P 500 down, all of their portfolios down.”
2. Continue Averaging
Cost averaging is the practice of regularly investing the same amount of money, regardless of market conditions. You might buy fewer stocks when prices are very high during a
bull market
but your buying balances out when you buy more shares at a lower price during a bear market.
Morong adds, “If you invest on a weekly, monthly or yearly basis, I wouldn’t do anything different. The only exception is for someone who invests in increments, as if you were adding money to your investment accounts of an annual premium.
If you typically pay a lump sum into your investment accounts, Morong recommends dividing that lump sum into regular payments from your cash flow instead of waiting for a large sum of money to be invested.
3. If you can afford it, buy aggressively while the market is falling
“When COVID happened, my clients were like, ‘I wish I had more money to buy all these stocks and buy in the market right now.’ Now we are in that environment again,” Morong says.
Before doing this, however, many experts, including Morong, generally recommend building up an emergency savings fund before aggressively investing in the market. An emergency savings fund is three to six months of living expenses typically kept in a high-yield savings account that’s easily accessible in case of an emergency, like a layoff or a car accident.
4. Understand your time horizon
Morong explains that a time horizon is the time you plan to let your investment grow in the market before withdrawing it to devote to a specific goal. For example, some of his clients plan to let their investments grow for seven to ten years before cashing them in to buy a home or an investment property. Your expected retirement age can also tell you your time horizon.
She adds: “If you have a portfolio for a vacation home or a
advance payment
whether you’ve set a five- or seven-year goal, you may need to re-evaluate whether or not that money should be invested. Do you have time to wait for that money to rebound with the market? When do you Actually need that money?”
5. Take advantage of Ibonds
“I bonds are a risk-free way to get a higher interest rate than they can get anywhere in the market right now,” Morong says.
I bonds are low-risk federal bonds issued by the US Treasury indexed to the current rate of inflation. Right now, I bonds have an annualized interest rate of 9.62% and that’s “basically risk-free,” Morong says. Each year, you can buy up to $10,000 in I Bonds.
Their interest rate will change and there are restrictions on when you can cash them out, but they will never drop below 0% so you don’t run the risk of losing your money completely.
6. Hire a financial planner or advisor
Investing in a finance professional may seem counterintuitive when trying to save as much money as possible before a recession hits, but it’s an investment that can protect your money in the long run. Financial planners and financial advisors advise clients on how to budget, invest and save for future goals.
The main difference between the two is that a financial planner is a
fiduciary
, which means they are ethically bound to give you the advice best suited to your financial situation. A financial advisor, on the other hand, may receive commissions and kickbacks for recommending financial products that don’t meet your needs (although this isn’t always the case). Look for a “pay only” finance professional to avoid this problem.
“The biggest reason to hire a finance professional during a recession is simply behavioral accountability,” Morong says. “I think it’s very easy to be scared. When you don’t have anyone to brainstorm with, you can look at your portfolio and think, ‘Oh my God, that’s a slow bleed! That’s all. my money! It’s down 40%!” You might sell or make rash decisions.”
Morong adds that financial planners can help run different investment scenarios as the market moves so you can make the best long-term decisions. She says, “You can actually get hard numbers to understand the opportunity cost of different actions.”
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