money health weekly


What Happens When The Market Crashes?

I hope you haven't been paying attention to the financial news. I've advised against it before. I also hope you haven't been thinking about when to get in or out of the stock markets. I've advised against that. I've even told you to stop watching what the market is doing.

Nonetheless, even if you keep to yourself and enjoy your life doing the things you love doing, it's hard to ignore headlines such as, "5 Ways To Protect Against A Market Correction," "How To Invest In An Overvalued Market," "When You Can Buy Stocks On The Dip,", or "All Signs Show The Market Is Overvalued."

These attention-grabbing headlines sell ads and generate clicks, but they aren't advice. There are many out there who are very good at manipulating our emotions and fear is a big one. "What if the market tanks?" they'll ask us. They ask us what we're going to do if this happens or if that happens. Effectively, they scare us.

Better Approach

Instead of reacting to the news and markets, and instead of trying to outsmart and predict the markets, we should use the markets to our advantage. We will make no predictions about the future. We'll just prepare for it.

The Set Up

First we need to figure out what is important to us. Why are you saving and investing? What do you want to do and why? We have to first answer these questions for ourselves. Write these answers down; we'll use these answers when the markets turn scary.

The Portfolio

Portfolio is a fancy way to say your investments. This includes our savings accounts and savings bonds, too. To put together a portfolio we'll use globally diversified investments that are low-cost. Let me take a minute to decode that. Diversification means that we spread our investments around so that we don't have too much of one kind of risk. Global means that we should be investing in companies across the globe. And low-cost means that we don't want to pay too much to the mutual fund or ETF companies for access to these investments; we should look for low expense ratios, diversification within the funds, and low turnover (they shouldn't trade too much).

Asset Allocation

Asset allocation is an important decision that we make with our portfolio. It literally just means the allocation of our assets. We determine what percentage will be put in stocks, bonds, and cash. We take our time figuring this out because we don't want to have money that we need in the short run to be invested in stocks. Stocks are long term investments. We also have to get really honest with ourselves and figure out how much stock exposure we can handle. If you are someone who is glued to the news and reads the kind of articles I talked about above, then you should have less in stocks. If you are an excitement junkie and understand the long term nature of stocks, then you can afford to have more of your money in stocks.