If checking your brokerage account these days makes you want to scream, cry, or curl up in a fetal position while listening to angry music, you’re in good company. The stock market has been down considerably since the start of the year, and many people are watching the losses on screen in their portfolios.
This is not the first time that the stock market has gone through a difficult period. But the problem is that we don’t know when stocks will recover.
In a recent podcast, Suze Orman said stock market volatility is far from over and portfolio values may take a long time to recover. In light of this, Orman believes investors should do what they can to avoid incurring unnecessary losses on their investments. And one key move could be your ticket to getting things out.
Consolidate your savings
Orman strongly believes in having ample reserves of cash on hand. In fact, she tends to take a pretty 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 of living expenses. But Orman says an emergency fund with eight to 12 months of spending is more appropriate these days given factors like inflation and the possibility of a recession hitting soon. And having that extra money in savings could do more than help you weather a spell of unemployment — it could also save you from having to take losses in your brokerage account.
Of course, you might feel like eight to twelve months worth of bills is a lot of money to tie up in cash. And for you, it might be. But if you only have, say, a three-month emergency fund, it might be time to focus on increasing your cash reserves.
Say you lose your job and run out of emergency funds after three months. If you still don’t have a paying job at that time, you may need to start liquidating stocks to free up some cash that you can use to cover your bills. But if your portfolio is still down at that time, it could mean losing money.
On the other hand, a boosted emergency fund could save you a few months without having to touch your investments while you look for a job. And it could save you from locking in permanent losses and instead give you the flexibility to wait for your portfolio to recover.
Solid advice all around
Investing is a great way to grow long-term wealth. But by making sure your short-term needs are covered, you can prepare to invest with more confidence and avoid losses. As such, it’s a good idea to follow Orman’s advice and boost your savings now. It could be months or even years until the stock market regains the value it lost this year, and you’ll want the option to go with the flow as much as possible.
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