5 Tips For First-Time Investors During A Market Dip

As a first-time investor, making that initial deposit and setting up your portfolio can be difficult. During a market dip? Even more so. Here are 5 tips to help you make the most of your money.

5 Tips To Help First Time Investors During A Market Dip

Investing money for the first time may feel like diving into the deep end of the pool. It can be nerve wracking.

This is especially true if you consider the current worldwide pandemic and volatile markets. Before taking any action, it’s important to make sure you have your basic needs, like monthly bills and childcare, covered first. After that, you can safely determine whether to begin investing or not.

If you ultimately decide to, here are 5 tips to help new investors get started during a market downturn.

1. Have an emergency fund.

Just because you want to invest does not mean you should dump every penny you own into the stock market.

Set about three to six months’ worth of expenses and recurring payments aside in an emergency fund. This is a bucket of money that is held in either a high-yield cash account or very low-risk investments, and that you can access quickly if needed.

Transaction Timeline Table

Having an emergency fund will give you the freedom to invest the rest of your money more aggressively.

2. Invest at your own pace.

Investing a lump sum all at once can be scary. Even though studies show that a lump-sum investment will outperform two-thirds of the time, you may not feel comfortable doing that, which is okay.

Another approach is to invest a little bit at a time. One of the best ways to do this is by setting up an auto-deposit, where you choose the amount (ie. $300) and frequency (ie. monthly). That way you set your own pace.

3. Focus on your time horizon.

Not all your investments need to have the same risk level.

You are likely investing for many different financial goals at the same time, like a home down payment, future college expenses, or retirement. Each of these financial goals likely has their own time horizon, and thus should be invested differently.

In general:

  • Shorter-term goals should be invested more conservatively, and
  • Longer-term goals should be invested more aggressively.

Breaking your investments into goals allows you to better control your risk and build a personalized investing plan.

For example, Betterment automatically adjusts your allocations over time to account for market performance and your goal’s time horizon, ensuring that we work for you through all the ups and downs.

4. Pay attention to historical context.

As a new investor, you may not have much context or know what to expect in terms of performance.

From 1854 to 2009, the U.S. has been through 33 economic downturns. On average, these downturns last for about 1.5 years. After each of the past downturns, the stock market has fully recovered and even surpassed previous all-time highs.

That is all to say that we have been through many market dips in the past and likely will see many more in the future. They are an inescapable part of investing and are something that all investors, new and old, should learn to cope with.

Though you may be tempted to withdraw all of your investments or even halt your auto-deposits, now is the time to stay the course. History has shown us that the market, and thus your portfolio, will recover.

5. Focus on what you can control.

You can’t control the stock market. You also can’t control the news, inflation, GDP growth, or unemployment rates.

However, you can control how much you save, how much risk you take, staying diversified, and how you react when markets get scary.

In the long run, focusing on what you can control, and doing your best to ignore what you cannot control, is likely to give you better odds of investing success.

Make educated decisions about your investments.

New investors should not be discouraged by market dips.

At Betterment, our passive investing model is derived from the idea that taking action based on market movement can be detrimental: contrary to what you might think, this could actually lower your returns.

Despite this, when volatility hits, we are working for you. Our automatic allocation adjustments, portfolio rebalancing, features like tax loss harvesting, and updated personalized advice can help you ride out a market downturn.

Ultimately, being thoughtful about your finances and overall risk in your portfolio during market uncertainty can  help you weather the storm, no matter how long the downturn lasts.