The commitment made by President Donald Trump to impose a wide-ranging set of tariffs on nearly all of the United States’ trading partners has resulted in a significant decline in stock prices for the third consecutive day on Monday. This situation has led numerous business leaders to express concerns that the “Trump recession” is becoming increasingly probable — if it hasn’t already begun to manifest in the economy.
For everyday investors, this kind of market turmoil can feel disorienting and intimidating. However, financial experts suggest there are specific actions you can take immediately to protect your financial interests, as well as some behaviors you should actively avoid during this tumultuous time.
Here’s a comprehensive guide on how to navigate through this market instability while safeguarding your investments and maintaining your peace of mind.
Stay Calm: Avoid the Urge to Liquidate Your Investments
Attempting to time the market usually proves to be a futile endeavor; even seasoned financial professionals often misjudge market movements, potentially worsening your financial situation in the long run.
Exiting the stock market during sharp declines increases the risk of missing the initial recovery days, which are crucial for regaining lost ground.
A study conducted by Hartford Funds Management Group revealed that if you were not invested during the market’s 10 best days — many of which occur soon after the market’s most severe downturns — you could reduce your investment returns by as much as 50%. Missing just the top 30 days over a 30-year period could diminish returns by a staggering 83%.
Moreover, if you suspect a recession is on the horizon, withdrawing from the market and waiting for the downturn to pass may result in missing critical recovery phases, thereby locking in your losses. Robert Johnson, a finance professor at the Heider College of Business at Creighton University, previously advised Money that, “If you wait to reinvest until after a recession has concluded, the market has often already experienced a significant rise.”
Resist Checking Your 401(k) Balance
We understand the temptation — it’s akin to rubbernecking at a traffic accident. However, it’s crucial to resist the urge to frequently check your retirement accounts. “The first step to take is to shield your investment portfolio from your emotional responses,” stated Sam Stovall, chief investment strategist at CFRA Research, in a previous conversation with Money.
Fretting over your current balance or comparing it to your previous balances from last month or even last year is ultimately a fruitless exercise, as these figures only reflect hypothetical gains or losses.
“You haven’t actually lost anything unless you’ve executed a sale,” he emphasized.
Maintain Perspective: Focus on Long-Term Goals
One of the most common errors investors make during periods of market volatility is concentrating solely on short-term negative trends, according to Michelle Soto, a financial planner at Cerity Partners, who shared insights with Money previously.
Financial markets are inherently cyclical, a reality that may be easily overlooked when faced with a barrage of red numbers on your screen. Bear markets, even the most severe ones, are integral to this cycle, and a well-crafted financial strategy should seamlessly accommodate both the peaks and valleys of market performance.
Implementing a strategy known as dollar-cost averaging — which involves consistently investing a set amount of money at regular intervals regardless of market fluctuations — is a dependable method for growing your savings without the stress of trying to time your investments perfectly.
“This approach removes emotional decision-making from the equation,” remarked Marguerita Cheng, a certified financial planner at Blue Ocean Global Wealth.
Market downturns can serve as valuable opportunities to realign your focus on long-term financial objectives and even present advantageous buying situations. Continuing to invest through payroll contributions or other automated means during times of stock price volatility exemplifies dollar-cost averaging, requiring no specialized investment expertise and relieving you from the burden of constantly monitoring daily market fluctuations — an especially welcome reprieve when distressing news is just a click away.
Enhance Your Knowledge: Educate Yourself About Market Dynamics
Staying informed about the terminology and mechanisms that influence the broader market can significantly alleviate anxiety during periods of high volatility. For example, knowing what a market “circuit breaker” is and the conditions that can trigger it can mitigate fears that a rapid decline in stock prices might jeopardize your retirement savings.
Grasping the definitions and implications of market corrections and bear markets, as well as their influences from external factors, can simplify the process of deciphering the flood of information — and misinformation — prevalent on social media platforms.
Even if you do not intend to engage in more advanced investing strategies such as hedging your risk with derivatives, understanding how these financial instruments operate in the market can provide valuable insights into which risks you can manage and which strategies can help you balance wealth accumulation while minimizing potential losses.
Reassess and Rebalance Your Investment Portfolio as Needed
As time progresses, it is not uncommon for the allocation of your investment portfolio to change. This is why financial advisors typically recommend reviewing your accounts periodically throughout the year to make any necessary adjustments in order to rebalance your portfolio and ensure your asset allocations align with your long-term financial aspirations.
When stock prices undergo significant volatility in a short period, your asset allocation may quickly become unbalanced, as noted by Matthew Gelfand, executive director of Tricolor Capital Advisors, in an interview with Money. “During major market shifts, such as a 20% decline in stock prices [in 2022], investors’ portfolios can diverge from their intended allocations more rapidly,” he explained.
Capitalize on Current High Savings Rates Before They Change
The rising fears of a recession have intensified expectations that the Federal Reserve will soon reduce interest rates. According to the CME FedWatch Tool, which analyzes futures market activity to predict the Fed’s rate movements, there is currently a 31% probability that the Fed’s benchmark federal funds rate will end the year more than one percentage point lower than its current level, a significant increase from approximately 8% just a week ago.
For the time being, savers can benefit from yields on fixed-income products such as CDs and short-term Treasury bills, which align with the current federal funds rate range of 4.25% to 4.5%. Products insured by the FDIC, such as CDs, offer both security and a return that — at least for now — exceeds the current rate of inflation.
Explore More Insights from Money:
Stay Informed: 7 Expert Strategies for Navigating Stock Market Volatility
Smart Investing Techniques During Economic Recessions
The Surprisingly Simple Explanation for Why Even Skilled Stock Pickers Often Fail to Beat the Market
