Investors should gear up for more bumpiness.
- The stock market is down considerably since the start of the year, and the worst may not yet be over.
- Shoring up your cash reserves is a good way to protect yourself from having to lock in permanent losses in your portfolio.
If checking your brokerage account these days makes you want to scream, cry, or curl up in the fetal position while blasting angry music, you’re in good company. The stock market is down considerably since the start of the year, and many people are looking at on-screen losses in their portfolios.
Now, this isn’t the first time the stock market has gone through a rough patch. But the problem is, we don’t know when stocks will recover.
In a recent podcast, Suze Orman said that stock market volatility is far from over, and it could take a long time for portfolio values to recover. In light of that, Orman thinks investors should do what they can to avoid taking needless losses on their investments. And one key move could be your ticket to riding things out.
Shore up your savings
Orman is a firm believer in having ample cash reserves at the ready. In fact, she tends to take a fairly aggressive approach to building an emergency fund.
Many financial experts will tell you that it’s a good bet to have enough money in your savings account to cover three to six months’ worth of living expenses. But Orman says an emergency fund with eight to 12 months’ worth of expenses is more appropriate these days given factors such as inflation and the potential for a recession to hit soon. And having that extra money in savings could do more than help you ride out a period of unemployment — it could also save you from having to take losses in your brokerage account.
Of course, you might feel that eight to 12 months’ worth of bills is a lot of money to tie up in cash. And for you, it may be. But if you only have, say, a three-month emergency fund, it may be time to focus on boosting your cash reserves.
Let’s imagine you lose your job and deplete your emergency fund after three months. If you’re still not gainfully employed at that point, you may have to start liquidating stocks to free up cash you use to cover bills. But if your portfolio is still down at that point, it could mean losing money.
On the other hand, a boosted emergency fund could buy you a few more months of not having to touch your investments while you look for a job. And that could spare you from locking in permanent losses and instead give you the option to wait for your portfolio to recover.
Solid advice all around
Investing is a great way to grow long-term wealth. But in making sure your short-term needs are covered, you can set yourself up to invest with more confidence and avoid losses. As such, it’s a good idea to take Orman’s advice and beef up your savings right about now. It could be months or even years until the stock market regains the value it’s lost this year, and you’ll want the option to go with the flow to the greatest degree possible.
The Ascent’s best stock brokers for 2022
We pored over the data and user reviews to find the select rare picks that landed a spot on our list of the best stock brokers. Some of these best-in-class picks pack in valuable perks, including $0 stock and ETF commissions. Get started and review The Ascent’s best stock brokers for 2022.