Stay calm when the market dips
A bear market is just a fancy way of saying stock prices have dropped significantly and people are feeling pessimistic. When you see red on your screen, the urge to pull everything out is strong. But we usually find that sticking to a plan is better than reacting to the noise. Before you do anything, make sure you have enough cash set aside for emergencies in a high-yield savings account. This is money that stays liquid, meaning you can get to it instantly without penalty, so you aren't forced to sell your investments when prices are low.
The role of cash in your portfolio
When the stock market is volatile, your cash holdings become your safety net. You might look at Certificates of deposit, which are accounts where you lock your money away for a set time in exchange for a fixed return. These are great if you know you won't need the cash for a specific period. If you need more flexibility, checking accounts are meant for your daily spending, but they rarely grow your money. In a bear market, your goal is to keep your foundation strong. If you are struggling with high-interest debt, like what you might see on Credit Cards with a high annual percentage rate (APR), which is the yearly cost of borrowing money, paying that off is often a better return than any investment.
Understanding how your money earns
When you hold cash in a bank, you want to know what it earns. This is measured by the annual percentage yield (APY), which is the real rate of return you get on your money over a year, taking into account the effects of interest being added to your balance. Banks decide what to pay you based on what the central bank is doing with interest rates. When rates go up, you typically get a better APY on your savings. When rates drop, those earnings do too. Always compare the APY across different banks, but don't obsess over tiny differences if the account doesn't fit your life.
Avoid these common traps
- Panic selling: Selling when things are down locks in your losses. We prefer to think about the long term.
- Ignoring your total picture: Make sure your Mortgages are stable and your Insurance is up to date before you worry about timing the market.
- Chasing high yields: Sometimes an account offers a high rate just to get you in the door, but it might have hidden fees that eat your gains.
- Trying to time the bottom: Nobody knows exactly when a market will turn around. Investing small amounts regularly is usually smarter than trying to guess the right moment.
If you are feeling overwhelmed, remember that Investing is a marathon, not a sprint. Take a look at your Loans and see if you can pay down expensive debt before putting more into the market. A bear market is just one chapter in a much longer story.