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Your Market Survival Guide

November 05, 2018

4 min read

✓ Set up your emergency fund

✓ Diversify with a broad set of asset classes including stocks, bonds, and cash

✓ Diversify by having an appropriate level of bond exposure

✓ Diversify your stock holdings with ETFs

Watching the markets go up and down can make investors dizzy. Sudden dips and market volatility can bring on anxiety and cause us to act with our emotions.

Many of us remember the gloomy days of the financial crisis that began in 2008, when indexes such as the S&P 500, which represents 500 of the largest company stocks in the U.S., fell 40%. Investors lost trillions of dollars of wealth.

It’s important to have a blueprint to keep us focused during good times, and to give us a steady hand during the times when the financial skies are gray.

Follow this checklist for your finances. It can help you waterproof your life when it starts to storm.

Set up an emergency fund

An emergency fund is not an investing plan. But it’s the bedrock of your financial plan, and it should be step one of your savings goals.

Simply put, it’s money you have handy for those rainy days, when unforeseen events can take hold of your life, such as a sudden medical emergency, car repairs, or a job layoff.

Experts recommend putting away a minimum of three months worth of expenses, in a bank account where you can easily access it.

Diversify your holdings in your investment and retirement portfolios

Whether you’re investing to save for a home or for your retirement, a diversified portfolio is a great strategy.

Diversification means you’re not putting all of your eggs in one basket, so you can better weather the stock market’s ups and downs. That means you won’t put all of your money in too few stocks, bonds, or funds.

Here’s an example of what that means. If you buy only technology stocks or stocks in the energy industry, you’d be putting all of your eggs in one basket. If tech stocks experience trouble, or the energy industry suddenly must deal with a natural disaster, it’s likely the stocks in those industries will decline together, and you’d likely lose more money than if you were diversified.

What does a diversified portfolio look like? It might have stocks in technology and defense, but they also might include consumer staples, energy stocks, and possibly commodities, such as metals, to name just a few possibilities. It’s also likely to include bonds and some cash.

When you’ve diversified your portfolio, it will hold a variety of investments that are not all subject to the same market risks, including stocks, bonds, and cash, as well as mutual funds and exchange-traded funds (ETFs).

A diversified portfolio may cushion the blows when markets start to go sideways. By diversifying, you’ll be choosing investments in numerous economic sectors—not just the hot industry of the moment—as well as in different geographies around the globe.

Watch this video about diversification.

Diversify by owning ETFs

If you’ve bought individual stocks, you may be over-concentrated in one sector or industry.

One way you can start diversifying is by purchasing an exchange-traded fund, or ETF. ETFs are investment funds that are traded on an exchange, such as the New York Stock Exchange (NYSE) or NASDAQ. They invest in numerous companies at once.

ETFs often correspond to a particular size company, industrial sector, market, or even social goal. So, you could own shares in an ETF that owns blue-chip stocks of large companies, or the stocks of less well-known, smaller companies.

You could also purchase shares of ETFs that specialize in commodities, consumer products, even cloud computing, to name a few different options. An ETF might also invest in companies that are helping the environment or working to increase the number of women in leadership positions at large companies.

You can also diversify by balancing your ETF choices between domestic and international stocks, such as Asia, Europe, even emerging markets. By also investing in international stocks, you can potentially spread your risk by putting money into economies outside the U.S., which might perform better when the U.S. is having a bad year or years.

Find out more about how Stash can help you diversify here.

Diversify by owning bonds

Bonds can be an important part of your investment portfolio. Why? They are generally considered safer investments.

Bonds are basically IOUs from companies or governments, that periodically pay you interest over time, plus the full value of your principal (what you initially invested) by the time the bond matures. And having appropriate exposure to bonds in your portfolio can help you manage risk.

But not every investor is the same. For a variety of reasons—including age and temperament—some people may want to take more risk than others. The simple rule of thumb is this: The more bonds you own, the more conservative and the less volatile your portfolio will likely be.

It’s important to remember that all investments contain risks. But you can help protect yourself against the worst of the markets by diversifying with bonds.

Learn more about the different types of bonds here.

Ways to diversify your portfolio

How to diversify? Here are our recommendations for portfolio allocations and Mixes, based on risk type:

There are numerous types of bonds, and choosing a variety of bonds can help you diversify your investments. The different bond types include U.S. Treasuries, investment grade corporate bonds, municipal bonds, and junk bonds.

You can also learn to diversify by downloading the Stash app and using our Coach tool.

Learn more about Stash Coach here.

Stay on track with Stash

Get your investing checklist in order. It can help you take the emotion out of your finances and help you help you stick to your plans, and meet your future goals.

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By Jeremy Quittner
Jeremy Quittner is the senior writer for Stash.

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