3 Smart Moves to Make in Your Brokerage Account While Stocks Are Down
- In the current market environment, there are some steps long-term investors can take to set themselves up for success.
- Getting these things right in a down market can help you create long-term wealth, avoid rash decisions, and ensure that your investment strategy stays on track.
Take advantage of these tips right now.
The stock market is down significantly from its 2021 highs, and it can certainly be a scary time for investors. However, there are some steps you can take in the current turbulent stock market environment to help set yourself up for future success. Here are three examples.
1. Contribute enough to your retirement account
Experts generally suggest that Americans should aim to contribute about 10% of their salary to retirement accounts, and that's not including any employer matching contributions. Most people aren't even close to this -- the average 401(k) contribution is about 7% of salary, according to Vanguard. And many people simply contribute enough to take advantage of their employer's match (typically in the 3%-5% range).
If you aren't saving enough, now could be a great time to boost your retirement contributions. Not only will you be setting aside more money for your future, but you'll be doing so at a time when the market is down, which has historically been a great time to invest.
If 10% seems like too much, you don't need to get there right away. Even setting aside an extra 1% of your income in your 401(k) or IRA can make a big difference over the long run.
2. Perform a balancing act
If you invest through a robo-advisor or own target-date retirement funds, rebalancing is something that happens automatically. But most people need to do it manually every so often, and it's especially important to check after the market moves sharply higher or lower.
If you aren't familiar, rebalancing involves strategically buying and selling assets to make sure your investment strategy is still in place.
Here's a simplified example. Let's say that you determine that a 70% stock, 30% bond asset allocation is the right asset mix for you. Now let's say that you set up your portfolio this way, and your stocks have fallen by a total of 50% since then while your bond values have stayed the same. For the sake of using round numbers, let's say you started with $70,000 in stocks and $30,000 in bonds. Now you have $35,000 in stocks and $30,000 in bonds. Your 70/30 allocation has suddenly become about 54% stocks and 46% bonds. In this case, rebalancing would involve selling some of your bonds and re-deploying that capital into stocks to bring your allocation back up to the desired 70/30 level.
3. Sometimes, just do nothing
Finally, as a Certified Financial Planner, I can tell you from experience that the smartest move many people can make during turbulent market environments is to stop looking at your brokerage account.
To be sure, it's a good idea to have a general sense of what is going on with the stock market and your investments. After all, checking in every so often can let you know if you need to rebalance, as mentioned earlier, and can be especially smart if you're getting close to retirement age.
However, far too many people check their brokerage accounts, 401(k)s, and other investments far too often. And watching your account value in free-fall triggers an emotional response that can lead to rash decisions. The Dalbar Quantitative Analysis of Investor Behavior found that the average equity fund investor has dramatically underperformed the market over the past 30 years, and one of the biggest reasons is over-trading.
It's common knowledge that the main goal of investing is to buy low and sell high, but our emotions make us want to do the exact opposite, especially when stocks are down. We see our portfolio value falling and our instinct tells us to "get out before things get even worse." From a long-term perspective, this is never a smart idea, and the best way to avoid knee-jerk reactions is to stop checking your accounts every day.
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