How to Invest When You’re Scared of the Stock Market (2024)

My friend said to me the other day:

“I sold all my holdings in the 401k a couple of weeks ago. What do I do now that the Dow just went up 11%? Is this the bottom?”

Editor’s Note: Scratch that… it’s up another 15% since that text from him for a 25%+ move!

I replied, “I don’t know. In fact, nobody knows. Everyone will have an opinion on whether we are at the bottom of market valuations, and a ton of them will turn out to be right. But you can’t act on that information alone because no one knows who’s prediction will come true in advance.”

What I do know, though, is that moves you make now can significantly affect how much of a nest egg you will end up with. Studies have shown that people who tinker with their portfolio end up making costly mistakes, but we are humans after all.

If you already sold out and can’t quite figure out how to get back in, or simply scared out of your mind that you still own stocks, then here’s what you need to do:

First, you need to be honest with yourself. No one really knows how this will play out because the virus will dictate how long we are shut down and that, in turn, will dictate how much of a hit our economy will take. Plus, no one can ever perfectly time a stock market bottom.

Are you willing to hold onto your portfolio mix even if it tanks another 30%, 40%, 50%? Or are you going to capitulate at the wrong time and cash out at what could be the ultimate lows? Do you even have the ability to ride out a storm?

What if you lose your job after the market falls another 20%? Do you have an emergency fund to ride out a period of low or even no income without touching your equity portfolio?

On the flip side, are you going to chase the market if you see the indexes shoot up 10-20% in a matter of days? The answers to these questions will dictate how much equities and bonds you should own.

Accept that you will make mistakes if you are going to tinker with your portfolio whenever volatility is high. The key, if you are going to trade, is to minimize the damage the mistakes cost you.

Whatever move you make, can you afford the consequences if your decision turns out to be a disaster?

Everyone’s need, ability and willingness to take on risks is different. Do you have too little in bonds? Too much? Now that you have a taste of volatility, you are much better equipped to answer this question.

Come up with a plan over the weekend. Don’t do it during market hours because you want to make logical decisions while the market isn’t jumping up and down trying to distract you.

While we are at it, make the plan in a quiet room. Lay out specifically what you are going to do if certain conditions are met to ensure that you don’t make rash decisions just because you read some article online in the heat of the moment. When are you going to sell, if ever?

A reminder: Again, staying the course and not market time gives the average investor the best odds of success, but if it’s inevitable that you will be shaken out of risk assets whenever markets make a swan dive, then at least figure out, ahead of time, a systematic way to sell that makes sense financially.

On the other hand, when are you going to buy back in if you have cash on the sidelines? Are you buying at a predetermined frequency, say, once a month?

If so, then work out a schedule ahead of time. For example, you could choose to buy 20% at 10am every first Wednesday of the month. You could, instead, buy once every time you get a paycheck.

You might decide that you want to wait until everything blows over.

If you are going to wait, what conditions will need to be met before you deem it clear skies? Is it when the infection rate curve is definitely flattening? Or is it when the whole country lifts the lock down orders?

If you don’t come up with a plan before you make your trades, then you will be paralyzed by second guessing yourself whenever the markets are back to swinging violently.

You will also be more likely to start buying on a big up day because you are afraid of missing out, only to sell everything when it goes down because you are afraid of losing everything.

Now, people do this all the time and it’s already very costly during normal times, but the effects are magnified at least ten fold these days when even indexes are making 10%+ daily moves.

Write everything down and stick to the plan. Once you decide what steps to take, it’s imperative that you follow through. Do not deviate from your plan!

You have to remember at all times that each action step was written when you were least emotional about your assets. This is your best chance of success. Take advantage of this.

Reassess your plan when your situation changes significantly. Avoid the danger of tinkering with your plan needlessly, but update it whenever your need, ability, and willingness to take on risks changes.

For example, losing a job you thought was bulletproof will affect your ability to ride out volatility, while receiving a windfall will increase your ability to deal with a prolonged downturn but at the same time decrease your need to own high growth wild swinging equities.

Look. The market is extremely volatile these days, and your emotional trades could cost you big time. For those who can’t honestly stay the course, it’s vitally important to come up with an action plan to limit the damage that your trades will make to your long term financial health. Otherwise, the moves you make now could seriously jeopardize your future.

Tagged as: Index Funds, Investing, Long Term Investing

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