Many people went into 2022 thinking the stock market was headed for a full-fledged crash. And so far, that hasn't happened.
But it has been a volatile number of weeks for stocks, with the market dipping into correction territory. And at this point, it's hard to predict when things will settle down.
While some of the recent volatility we've seen can be attributed to earnings-related disappointment and unemployment news (in a somewhat surprising turn of events, stocks tumbled in the wake of positive job growth), the reality is that stocks have been due for a correction for quite some time. And also, corrections are actually pretty common, and many seasoned investors know not to get rattled by them.
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If you're a newer investor, though, or a naturally skittish one, then the events of the past few weeks may have you shaken to your core. And you may be worried about future volatility as well. But while it's difficult to predict when stock values will decline, it's easy to take one key step to protect yourself in the face of market corrections.
Set yourself up to ride out those waves
The one thing it's important to tell yourself during a stock market correction is that you won't lose money unless you actually sell off assets at a price that's lower than what you paid for them. To, to put it a different way, if you just leave your stocks alone during volatile periods, you may not lose so much as a dime.
But to put yourself in a position where you're able to that, you'll need to make sure you have plenty of cash at the ready. That way, if unplanned expenses come your way, or if you lose your job, you won't have to rush to cash out investments to come up with the money you need.
That's why, as a general rule, it's a good idea to sock away three to six months' worth of bills in a savings account. While you won't earn interest much on that money (especially not these days), you'll secure your principal so it's there when you need it. And while you could technically keep that cash in your brokerage account uninvested, you're better off stashing it in savings so you're not tempted to buy stocks with it when market conditions turn favorable.
And to be clear, a stock market correction is actually a great time to add investments to your portfolio -- but you shouldn't use your emergency cash to do so. Rather, you should always maintain that cushion because it can not only help you avoid debt, but also avoid capital losses.
Will stocks settle down soon?
It's hard to say. We're still in the midst of a pandemic, and that alone could lead to prolonged volatility. And so the best way to alleviate your personal stress load in the near term is to keep your emergency fund well-stocked. That way, if the market continues to swing wildly, you'll be able to sleep at night knowing you're covered and won't have to tap your portfolio at the worst possible time.
