This year has been one for the record books for many reasons, but the stock market has experienced an especially wild ride. From its sharp downturn back in March to its record-breaking recovery, the market has proved once again that the only thing predictable about it is its unpredictability.
That unpredictability can make investing daunting, however, especially as you're planning for the future. While nobody knows exactly what 2021 has in store, there are a few investing moves you should make no matter what.
1. Keep investing for the long term
The stock market can experience extreme ups and downs in the short term, but it tends to be fairly stable over the long run. So as you're thinking about how you'll invest in 2021, make sure you're keeping a long-term outlook.
A long-term investing approach involves investing in stocks and funds that you believe will stand the test of time. These could be broad-market index funds that track the major market indexes such as the S&P 500 or the Dow Jones Industrial Average, or they could be individual stocks that are solid enough to withstand market volatility.
No matter how you choose to invest, try not to get caught up in how the market is performing right now. The stock market could experience more volatility in 2021, but as long as you're taking a long-term approach, that shouldn't affect your strategy.
2. Check your asset allocation
Asset allocation refers to how your money is divided between your different investments. You likely have a mix of stocks and bonds in your portfolio, and it's important to find the right balance.
The older you get, the more conservatively you should be investing. That's because if the market crashes right before you plan to retire, that could derail your entire retirement. On the flip side, if you still have decades until retirement but you're investing primarily in bonds with little to no money in stocks, it will be much harder to reach your investing goals. While your money will be more protected against market volatility, conservative investments typically don't see nearly as much growth as stocks.
A good benchmark when it comes to asset allocation is to subtract your age from 110. The result is how much of your portfolio should be invested in stocks. If you're 45 years old, for example, subtract that from 110; the result is 65. So approximately 65% of your portfolio should be invested in stocks, and 35% in bonds.
By checking your asset allocation each year, you can make sure you're investing aggressively enough to reach your goals, but conservatively enough that you can still retire even if the market takes a turn for the worse.
3. Make sure you have a healthy emergency fund
If 2020 has taught us anything, it's the value of a well-stocked emergency fund. Unexpected expenses and job loss can happen out of nowhere, and an emergency fund can help keep your finances on track.
When you have at least three to six months' worth of savings set aside for emergencies, that can also help protect your retirement investments. Tapping your retirement fund before you retire can result in some hefty penalties, not to mention the fact that withdrawing your savings makes it harder for your investments to grow.
Even if you have a stable job and don't expect to need your emergency fund in 2021, it's always a good idea to have some extra cash on hand just in case.
This year has been challenging for everyone, and nobody knows what to expect in 2021. But with these timeless investing moves, you'll be on track for a brighter financial future.