Suze Orman: 5 Strategies for Handling Stock Market Swings
The market goes up, and the market goes down. Volatility is the name of the game when it comes to trading within the stock market, and savvy investors know that having a few strategies in store for when things truly get a bit more turbulent can be a financial lifesaver.
Money expert, author and podcast host Suze Orman has made a name for herself as a high-profile personality, and her advice is taken seriously by her audience – and often reinforced by financial institutions and analysts.
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Orman recently talked about taking some of the emotional thinking out of investing, providing a bundle of wisdom tied to long-term investing plays. Let’s dive in.
1. Be Diversified
Diversity is paramount: When it comes to your portfolio, diversification matters – mostly because it keeps you at least partially insulated against massive spikes and dips.
“At a minimum, keep 50% of your stock portfolio in a low-cost index fund or ETF. That’s your foundation, which is invested across hundreds of stocks,” Orman advised, adding that there was little reason to own a large position in individual stocks.
No single stock should represent more than 5% of your entire portfolio, she explained.
2. Don't Rely On Stocks To Fund Living Expenses
Stocks are an add-on, not a reliable way to fund current living expenses. Orman strongly urged investors to think of their stock holdings as an ongoing concern, rather than a current source of day-to-day-living expenses.
By keeping a healthy cash reserve on hand (in addition to a six-month or one-year emergency fund), you don’t have to worry about liquidating stocks when they’re down to cover costs. Fidelity agreed, noting that “guaranteed” sources of income, such as pensions, annuities and Social Security checks, should be used to cover essential expenses.
3. Know How Much You're Investing
Stocks are the best way to beat inflation creep. While some might be satisfied to sit on their laurels and retire on their savings and Social Security income, the stock market lets you beat inflation, so you need to decide how much to invest in stocks, per Orman.
"That might be 50% of your overall investments, or 40%, or 60%, or more. It’s your decision based on your current needs," Orman wrote. "The amount you had invested in stocks when you were 30 may not be the right amount when you are 55 or 65."
4. Dollar-Cost Average
It’s all about dollar-cost averaging. This term gets bandied about all the time, and if you’re an investing newbie, it’s time to learn the lingo.
When you have a lump sum in hand, consider investing it over the course of five or six months rather than developing anxiety over trying to time the perfect buy into the market. Automatic contributions into an IRA, or a workplace retirement plan, are similar ways to dollar-cost average without getting emotionally involved.
5. Think Long Term
Long-term vision beats fast money hopes. While your mileage may vary when it comes to what’s considered “long term,” Orman took a very conservative position on the subject.
“Money you need in the next five to seven years does not belong in stocks. History shows that when we are patient – five, seven, or ten years – the market tends to recover from down periods, and builds wealth,” she said.
Less concern about the bumps and hitches of inevitable market volatility means smooth, predictable gains over an extended window of investment gains (and compound returns) – and reports from Charles Schwab doubled-down on this philosophy. It noted that staying the course amid market downturns and volatility can help reduce the length of recovery.
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This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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