"What to do when the market crashes"

A market Crash is coming

We all know that a crash is coming. The International Monetary Fund (IMF) just came out with a warning that the world economy could be on the verge of another recession, housing is becoming unaffordable in many cities, and wages have been stagnant. We also know that everything is cyclical, and the market can’t go up forever. So what should we do when it all hits the fan again?  What should you do when the market crashes?

When the Market Crashes

When the market crashes, there is going to be a lot of turmoil. Investments will definitely lose value, and people may lose their jobs. Companies may shut their doors for good, and the economy may move back into a recession. With all this uncertainty surrounding jobs, the economy, and the market, what should you do?

Job Loss

I get that losing your job really sucks, especially when you depend on the income. Therefore, if you lose your job when the market crashes your first priority is finding income. Hopefully, you have a decent emergency fund that will get you through for the first few months at least (If you don’t, now is the time to start saving!).

Even if you don’t have an emergency fund, there are lots of things you can do to start getting some income in: you could take a part time job, start a side hustle, sell some stuff, or even switch industries.

You could also apply for unemployment insurance to get you through the rough patch. I know that everyone hates the idea of applying for unemployment, but seriously folks, you pay into this system and that’s what it’s here for. There is no shame in getting a little help to see yourself through.

 The point is, a job loss is not the end of the world. You will get through it and you will find better opportunities. Who knows, maybe it will give you the chance to build that side hustle into a full-time gig!

What not to Do

When you lose your job, it’s super tempting to cash out of any employee sponsored retirement plan you might have held with them. Bonus money when you need it the most, right?

Wrong!

Don’t do it! I get that you might need money, but taking it out of your retirement should be the very last of all the last resorts. You’ll hurt yourself in the long run when it comes to retirement income, and you will lose out on any investment gains that result from this investment cycle.

What to do instead

 Instead, try some of the options that I mentioned above to get some money coming in, and roll over your employee sponsored plan to an individual plan (IRA). You’ll get to keep your hard-earned investments growing and you won’t have to pay any early withdrawal fees or taxes. You also won’t be stealing from your future self.

Investments

When the market crashes, your investments are going to lose value. That’s the nature of the economy. And it’s going to be rough!  You’re going to watch your investments loose 20%, 30%, maybe even 50% of their values! It’s definitely going to be hard to watch that.

What Not to Do

 Emotions are running high, and you may think that the most prudent thing to do is to pull out of the market to hold onto whatever money you have left.

Wrong!

Please check out the difference between realized and unrealized losses before you make any rash decisions on pulling out of your investments. As long as you are diversified, staying in the market is your best chance at recouping your losses and making huge gains. According to a CBS article in 2011, investors who stayed the course with their investments throughout the crash were the biggest winners.

Don’t let your emotions prevent you from winning big during the next downturn.


 

What to do instead

Instead of pulling out of the market, you should be investing more!  I know, it seems counterproductive, but if you don’t want to listen to me, listen to the number one investor of our time, Warren Buffet:

“Be greedy when everyone else is fearful, and be fearful when everyone else is greedy”

A market downturn is the best time to be greedy. It’s basically a huge sale on stocks. The one thing I would advise is to be careful with individual stocks. You don’t want to put all of your eggs into the next Circuit City’s basket. In my opinion, its best to buy index funds, because they are automatically diversified and you have the best bet of recouping any losses with them.

If you have your heart set on individual stocks, do your research. Buy strong dividend paying companies that you know aren’t going to go under. During the last recession, I bought 200 shares of BOA when the stock plummeted to ten bucks a share. It’s now trading at thirty dollars a share, and my reinvested dividends have purchases 15 more shares. I plan to hold the stock through the next bear market (and possibly buy more!) because although their business practices are sometimes shady, they do have strong fundamentals.

But I am also aware that banks took a huge hit during the last downturn, and many of them went out of business. I know that owning individual BOA stock is a much larger risk than owning index funds. Fortunately, the majority of my eggs are in Vanguards total market fund.

If you are retired/near retirement

A lot of this advice applies mostly to people with at least ten years until retirement. If you are closer, your options may be a bit different. Hopefully, if retirement is on the horizon, you have a good portion of your nest egg in safer investments, such as bonds CDS and even cash. If not, the prudent advice is still to maintain your investments. A good option would be to work for a few extra years during the downturn and keep investing.

If you can’t work (or really don’t want to, I get it!) try to rely on Social Security and or other sources of income before tapping into your investments. If you can stay invested during the worst times, your portfolio will bounce back with huge gains.

Prepare Now

Thankfully, the market hasn’t crashed yet, so you don’t really have to worry about these things. But I’m writing this because we all know that it’s coming, so we need to be prepared. We need to be thinking about what we are going to do when the market crashes, if we lose our jobs, if our investments tank. We need to be preparing now for the next market crash so it doesn’t destroy our financial security.

Have you been preparing for a crash? What will you do if you lose your job or if you lose half of your portfolio?  Lets talk about it!

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"bad investments"

Bad Investments for Beginners

As a companion piece to our Beginner’s Guide to Investing, I thought it would be nice to flip the script and write about some bad investments for beginners. Keep in mind, none of these are bad investments in general (except the shady ones at the end!). They are definitely things to research and consider when you achieve intermediate investor status. However, as a beginner, these are things you should steer clear of until you have a bit more investing experience.

Individual Stocks

I have a few individual stock holdings, so don’t take this to mean that buying company stock is a bad thing. It’s not!  It’s an awesome thing!  I don’t think they are the best investment for beginners for a couple of reasons:

Expensive

Sure, you could buy penny stocks for decent prices, but those are terrible investments (they are more of a gamble). If you are going to buy individual stocks, you need to focus on strong companies that pay dividends. Unfortunately, these stocks usually don’t come at bargain basement prices. In addition, you have to pay a brokerage fee every time you buy and sell, and you can’t set up automatic investing (Well, I’m sure there are websites that let you do that, but it will cost you the brokerage fee each time, and that’s ridiculous). 

Not worth it unless you have lots of capital

Not only are individual stocks expensive, but you need also need a lot of them to see any investment gains. You have to buy at least 100 shares to see any real gains, even on dividend paying stocks. And 100 shares of a quality stock can get crazy expensive! 

Story time! I bought 1 single share of Microsoft stock back in 2010 (ish) for about $26. You know what that stock is worth now? Seven years later, that single share swelled into a whopping 1.25 shares!!  And my investment gains are sitting at around $70!  Can you imagine how much money I’ll make off this investment in another 20 years if the market keeps going the way it is?  You guessed it: Not much.

So why did I buy it?  Honestly, I was just trying to experiment with buying stocks. I had maybe $100 bucks to invest, and instead of putting into a mutual fund, I decided to try my hand at the stock market. So, I bought 1 share of Microsoft for a quarter of my money, then I bought a bunch of useless penny stocks. I guess I got back to my initial investment with Microsoft, so it wasn’t a total loss.

Non-dividend paying stocks are even worse. You could buy 100 shares and never see any investment gains. The one positive side about the Microsoft stock is that it pays dividends, so eventually I’ll have 2 whole shares, and eventually that will grow into more shares. I’ll have something to leave to my niece and nephew, because it may actually be worth some good money by the time they retire.

Risky

Another big drawback to buying individual stocks is that they come with a huge amount of risk. Sometimes companies get bought out and sometimes they go out of business. There may be an economic crash that certain companies just can’t recover from (who remembers Circuit City?) You can risk losing your entire investment if the company that you picked goes bankrupt. You can also lose your entire investment if the company you picked ends up on an episode of American Greed. It sounds funny, but it seriously happens! 

 

Investing in Stocks

Because of those three things, I wouldn’t recommend investing in individual stocks until you are fully reaping the match of your employer sponsored account and invested in some low-cost index funds. I also would recommend getting familiar with the market before making any stock investments. Sign up for Investopedia’s free stock market game  and practice investing with virtual money. Once you have it figured out, take some real money and pick some individual stocks. Start with highly reputable companies that pay dividends.

Bank accounts

Bank accounts (checking and savings) aren’t investments. They are safe havens for your money. If you live in the US and have under two hundred and fifty thousand dollars in the bank, all of your money is insured by the FDIC even if the bank goes under (the only exception would be if the United States collapses, and if that happens I’m pretty sure we will have more serious problems). So bank accounts are awesome safe places to store your money.

Unfortunately though, we are living in a time of low interest rates. According to Bankrate the national average interest rate on savings accounts is just under 1%. That’s ridiculously low! You won’t even beat inflation with that!

Now I’m not saying not to store money in the bank. They definitely have their place. Having liquid cash in accessible accounts is extremely important, but it’s not going to make you any money. Therefore, its not a good investment.

Other Investments

Are you extremely risk adverse but looking for better gains than a bank account?  Well I have two options for you!

CDS

CDs are very similar to bank accounts, but they usually pay a little bit more in interest (though with interest rates so low, they have been fairly close in recent memory!). CDs are long term investments though. The bank is agreeing to hold your money and pay you a higher interest rate than you would get with a savings account, while you are agreeing to not withdraw your money for the life of the CD. There are shorter term CDS (as short as 3 months) and longer term CDS (3 or more years!). In general, you will get higher interest rates with longer terms. You will also find higher rates on the CDS with higher minimum investment amounts. The best CDs are paying about 2.5% interest right now, and while that it better than nothing, it probably isn’t enough to beat inflation in the long run.

Bonds

Bonds are basically loans. There are two types, corporate and government. When you purchase a corporate bond, you are lending money to a company. When you purchase a government bond, you are lending money to the government.

Bonds are way safer than stocks. They are a great investment that helps keep large portions of money safe while still offering a bit of growth to combat inflation. Unfortunately, safety comes at a cost. You won’t grow your money very well if you invest in bonds. This investment type is best for someone who is close to retirement age and wants some protection against market volatility in their final stretch. It’s a bad investment for beginners.

Shady Things

Shady things are bad investments for everyone, not just beginners. But when you are just starting out, it may be harder to spot the red flags. Some examples of shady investments are: a “hot tip”; a friend’s amazing business opportunity, pyramid schemes, non-reputable investment firms, and companies in which the only information you can find about them are obviously affiliate links (you’ll know them when you see them!). It’s unfortunate, but there are tons of people out there trying to get a piece of your money in nefarious ways. My recommendation to avoid this is to always do your research and utilize well established, highly rated firms for all of your investment needs.

Does anyone else have any examples of bad investments for beginners?  Let us know in the comments and lets all partner together to help each other achieve financial independence!

 

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"beginner's guide to investing"

Beginner’s guide to investing

Do you want to start an investment portfolio but aren’t sure where to start? We are here to help you! In this beginner’s guide to investing, you will learn what type of plan to use, what the best investments for beginners are, and how to how to actually invest the money. After all, what are Partners for?

Investment Plans/Accounts

The first thing you need to learn in the Beginner’s Guide to investing is what type of plan or account you should be investing in. The three best account types for beginners are employee sponsored plans, individual retirement accounts, and brokerage accounts.

Employee Sponsored Plan

If your employer offers any type of match, then the first thing you absolutely need to invest in is your employee sponsored plan. Many employers will offer matching contributions of up to 5%!  That’s like getting a 5% pay raise!  It’s basically free money, but you only get it if you contribute. So, if you work somewhere that offers the match, take it!  Start there!

Individual Retirement Accounts

Regardless of whether your employer offers a plan or not, you should be putting money away for retirement. Luckily, most investment firms offer Individual Retirement Accounts (IRAs) to let you do that! There are two types of IRA, the traditional one (usually just referred to as IRA) and the ROTH IRA.

There are two major differences between the IRAs, and whichever you chose will depend upon your individual situation. The traditional IRA is a tax deferred account. That means you can deduct all of the money you put into it from your taxes each year. It also means that you will be penalized for taking out any money before you hit 59 and a half years old. When you reach retirement age and start withdrawing, you will have to pay taxes on your withdrawals as if they are income. If you need the money before you reach the minimum age, you will have to pay the taxes and an early withdrawal penalty. You definitely want to avoid that!

The ROTH IRA is different in both of those regards. You cannot deduct your contributions from your taxes (because you are investing post tax dollars), but you aren’t penalized for taking any of your initial investment out (you are penalized for taking out any profits). You also won’t have to pay taxes on anything that you withdraw when you reach retirement age (as long as you’ve had the account for more than 5 years. There are lots of withdrawal rules for the ROTH IRA, and you can read about them all here

The main thing you should take into account when deciding upon which IRA type you want is your tax strategy. Do you want to pay the taxes now or do you want to pay them later?

IRA problems

The biggest issue with both types of IRA is the contribution limit. You can only put $5500 into any type of IRA account per year if you are under age 50, and only $6500 per year if you are 50 or over. If you want to save more than that (and you should!) you need a different type of account.

 

Non-retirement Brokerage accounts

The last main account type for investing is a brokerage account. These are great because not all of our investments are meant for retirement. You may be on a path to financial independence, so you may need to start withdrawing money from your investments before you get to the traditional retirement age. There are plenty of companies that offer non-retirement brokerage accounts. Some banks even offer them as well. Vanguard is my favorite, but there’s also Fidelity, Merril-Lynch, Edward Jones, and a whole lot of other investment management companies (you can also open IRAs with these companies, if you want all of your investments in one place). 

Types of Investments

Ok, so you’ve decided upon what type of account you need to open. The next step in our beginner’s guide to investing is to decide which type of investment is best! There are basically only three different types of investments that I would recommend to beginners. These are: index funds, target date funds, and mutual funds.

 Need a ledger to track your investments? Check out this accounting book on Amazon* 

Index funds

Index funds are my favorite type of investment. They are low cost funds that track certain market sectors. They usually aren’t actively managed, so whatever companies are tracked in the fund are the ones that you are invested in. One of the most well-known index funds is the S&P 500,  an index fund which tracks about 500 of the biggest companies in the US.

Related:  Which Vanguard total market fund should you pick?

My favorite types of index funds are full market index funds, because they basically track the entire stock market. I highly recommend Vanguard’s total market fund. It is well diversified and has a super low expense ratio. That means that it won’t tank if only a certain sector of the market tanks and it doesn’t cost a lot to maintain. Additionally, it is very very rare that a total market fund will completely go out of business. The markets may have a correction and go down, but as long as you stay invested you probably won’t lose money over time. Remember losses aren’t real until you cash out.

Target Date Funds

Target date funds are index funds that automatically adjust the amount of risk they are exposed to as the fund holders get closer to retirement. This means that they will slowly sell off equities and move into bonds as the target date gets closer.

 My work has 6 different options for target date funds: 2025, 2030, 2035, 2040, 2045, and 2050. Every five year a new fund gets created. I have some of my money invested in the 2040 fund, because that is when I’ll be close to retirement age. My older coworkers are invested in the 2030 or 2025 funds, because they are much closer to retirement.

The target funds are the absolute best for people who hate actively managing investments. If you want to be a “set it and forget it” investor, this is the best type of fund for you.

"Beginner's guide to investing"
 

Mutual Funds

Mutual funds are another good investment for beginners. Usually, a mutual fund will track a certain sector of the market. Some mutual funds are dedicated to certain sized companies while some invest in certain industries. Mutual funds are usually actively managed, which means that somebody is working every day buying and selling stocks to try to boost the fund’s performance. This also means that they have a higher expense ratio (cost more!). All of the people invested in the fund are paying the fund manager to make those trades. Sometimes this ends up being beneficial, and the fund outperforms the general market. Sometimes it doesn’t. Investing is inherently risky. If you do decide to invest in mutual funds, be sure to diversify and pick a few different ones. That way, you are protected if something happens to a certain sector.

How to invest

The last main step in our beginner’s guide to investing is how to invest. There’s really only one option that I like, and that’s dollar cost averaging. With this method, you take a regular amount each paycheck/month/week and invest it. I have $100 per paycheck automatically going straight to Vanguard, regardless of what the market is doing. Sometimes you are buying when the market is up, and sometimes you are buying when the market is down. It averages out over time.

Its also super easy to do. You just have to set up an automatic withdrawal from your checking account or bank account. Most investment firms have an online step-by-step, so it’s super easy to set up. 

The other methods are lump sum purchases and investing when you have the money. Investing at some point is better than not investing at all, but if you make it a regular thing it’s easy to stick to. Also, with dollar coast averaging, you don’t even think about timing the market, so it’s great psychologically too.

Beginner’s Guide to Investing

So there you have, a quick and hopefully easy beginner’s guide to investing. I hope this helps you start your own journey to financial independence. We also published a post outlining the bad investments for beginners,  check it out to learn what not to do!

If you have any additional investment ideas or tips that would help beginners out, please feel free to share them in the comments!

 

*Links with this next to it are affiliate links. That means I’ll receive a small commission if you decide to click on it and buy something. Don’t worry, it doesn’t cost you anything extra! Also, I am not in anyway affiliated with any of the investment firms that I mentioned (outside of having accounts with some of them). I recommend Vanguard because I use them and I like them, not because they pay me to!

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I finally bought my Vanguard Total Market fund!  I’ve heard amazing things from tons of people about this fund (the biggest perk being the instant diversification), so after a lot of my own research, I decided to buy in. If you are serious about your quest for financial freedom, you should definitely look into investing in a total market fund. As you could probably tell, I prefer Vanguard.

Which one though?

Apparently, there are three different funds that you can buy which are technically “Vanguard Total Market” funds. I had no idea! I knew I wanted the total market fund, but I had no idea what the difference was between these three. Time for more research!  But luckily for you, I did the research so you don’t have to!

Vanguard Total Stock Market Index Fund Investor Shares (VTSMX)

Vanguards Investor Shares fund is a mutual fund with holdings in the full range of the equity market. This fund invests in small cap, mid cap, and large cap stocks in addition to growth and value stocks.  The minimum buy-in amount for this fund is three thousand dollars, and the minimum additional investments are only one dollar. This is a great fund for someone who wants to track the whole market and also wants to use dollar cost averaging to add to their investment. The expense ratio for this fund is .15%, which is well below average.

Vanguard Total Stock Marked Index Fund Admiral Shares (VTSAX)

The admiral shares index fund is pretty much exactly the same as the investor fund. The only differences are higher buy-ins and lower expense ratios. If you have ten thousand dollars to invest and want to keep adding to your investment, the admiral shares are definitely the way to go (this is what I bought!). If you can only scrape together three grand but want the same re-investment privileges, you should go with the investor shares. Just be sure to switch it over to Admiral shares once you reach the 10K mark!  There is no reason to pay more in expense ratio fees than absolutely necessary. The expense ratio for the admiral shares is only .04%! It’s a total steal!

Vanguard Total Market Fund ETF (VTI)

If you are not interested in adding more money to the fund (outside dividend re-investments) then getting the ETF may be a better option for you. The expense ratio is the same as with the Admiral Shares (.04%!) and there is no minimum buy in amount!  The problem with this fund is that you can’t add to it automatically from your paycheck like you can with the other two. This ETF works more like an individual stock, where you have to go in and do the whole “ask” price thing. You have to buy full amounts at the market price when you place an order, and you will probably have to pay a brokerage fee each time (which varies depending on which platform you use for trading). You can buy more of this ETF whenever you want, but its not as easy to set up automatic investing.

Related: Use credit card rewards to score big!

So…

Vanguard total market fund

which one should I chose?

Like I said before, I chose the admiral shares because I had 10 thousand dollars to invest and I wanted to automatically invest more every paycheck. If you have 10 thousand dollars or more, this is the absolutely the best option, because it has the same expense ratio as the ETF, and gives you the option to add the automatic investing (and even if you don’t want that now, you never know, you may in the future).

But not everyone has 10K to dump into a fund, and if you don’t the fund you should chose depends on what your goals are. If you have less than 3K to invest the ETF is probably best for you (unless you want to save up 3K before investing, always an option!). However,  If you have between 3K and 10K but don’t have any desire to set up automatic investing, the lower expense ratio of the ETF makes it a better option. But if you have between 3k and 10K and plan to set up automatic investing, the investors share fund is probably going to work best for you.

Related: Hopefully our Vanguard Fund Will help us achieve our 2018 Goals!

Clear as Mud?

I know investing can be confusing. I love that Vanguard makes investing in the stock market super easy, especially for the lay person. And hopefully, this short post can hep you decide which Vanguard Total Market Fund will best meet your needs.

 

Final Word

For the sake of a full disclosure, you should know that I have absolutely no affiliation with Vanguard other than having my own account. I will not make any money if you click one of the links, open a Vanguard account, or buy into one of the three accounts I wrote about. I’ve written this post because I have an account with Vanguard, I believe in their product, and I was confused when trying to figure out which fund to purchase. I’m not gonna lie though, if Vanguard had an affiliate program I’d sign up in a heartbeat, because I truly believe in their product (and I’m only going to add affiliate links for products that I believe will add value to your life).

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