Financial Advice in a Down Market
Misery can run high in a down market, as people suffer through job loss, decreased property values and investment losses. Getting through a down market requires a long-term view of your finances. With some key pieces of advice and a lot of patience, you can come out on the upside of a down market.
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Cyclicality
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The market is a cyclical animal. This means that it operates in cycles. Like a wheel, sometimes you'll be on the top and sometimes you'll be in the bottom. However, what's important to remember is that nothing is permanent. Periods of stagnation or loss will be followed by periods of boom, and likewise, what goes up will eventually come back down. The key is having patience while the down market rebounds.
Investments
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It's sometimes too easy to panic in a down market and pull out all of your money from investment accounts and retirement accounts. This is actually a counterproductive strategy. While the stock market may take alarming downward dips, historically it has trended upward, so those dips are nothing to panic about. Eventually, they will even themselves out, and what look like devastating losses will again turn into profits, if you are brave enough to wait out market fluctuations. Additionally, pulling money out of investments in a down market doesn't help the market, but rather hurts it more by fueling panic and keeping money from companies that they need to survive.
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Property
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Often in a down market, housing values will crash, leaving many homeowners owing a lot more on their homes than the properties are worth. This is known as being "underwater." In some cases, job loss can also leave homeowners unable to pay their monthly mortgages. However, if you are still able to pay your mortgage, you should continue to do so rather than bail on what now may seem like a terrible investment. The housing market too will recover and your home will again be worth what it once was. Like the stock market, the housing market periodically takes sharp, downward dips, but over the long term, it trends upward.
Cash Flow
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A down market is not the time to spend your disposable income on expensive vacations or electronics. A wiser strategy is to save as much as possible. After all, you don't know when you'll be the one to get the pink slip from your job. Because down markets are often accompanied by a scarcity of jobs, it's important to be prepared for the worst case scenario --- not getting a regular paycheck. Having a monetary cushion set aside will ensure that you can pay those essential bills, like your mortgage, if you suddenly find yourself out of work.
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References
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