I've been preparing for a stock market crash or milder correction ever since the bear market of the Great Recession. According to a recent AP article, more ordinary people or "individual investors" are starting to buy stocks. Unfortunately, the everyday investor is often late to the game. Many analysts even view it as a sign the market is about to correct. According to Lipor, individuals have invested $167 billion into equity mutual funds this year compared to the $111 billion put in by large institutional investors. I won't be fazed by a stock market pullback because I have become more careful with my asset allocation as well as how I handle my overall budget.
Overcoming my greed
In order to have the money I need when I'm retired, I had to detach myself from my investments. During the dot.com bubble, I let my greed rule my decisions instead of following the basic rules of investing over the long term. I bought high instead of being patient and investing a little at a time over the course of many years. I used to buy more individual stocks, but now focus on ETF (exchange traded funds) that pay dividends. I don't check my brokerage account every day, but monitor it monthly.
Committing to asset allocation
Just before the stock market plunged in the past, I had most of my money in stocks. Since the Great Recession, I've been sticking to a plan to keep 40 percent of my retirement money safe and sound in cash, money market and some bonds. I also began investing in ETN (exchange traded notes) that will go up when the market goes down.
Thinking outside of stocks
Another way I started to create more financial peace in my life was by finding alternatives to the stock market. I am going to be a lot less stressed about money if the market crashed sitting in my paid-off home. Since the Great Recession, I started an ambitious plan to pay off my home early. I refinanced to a lower rate. We have already shaved 8 years off our original 30-year mortgage while also reducing our payment from $1,200 to $900 a month.
Taking advantage of the Roth
Before the Great Recession, I didn't differentiate between regular 401(k) and Roth 401(k). Now, I only save in a Roth IRA and Roth 401(k). When I left a former employer, I was able to move my regular 401(k) money over to a Rollover IRA. Each year, I convert a little bit of the Rollover IRA into a Roth IRA. I can only afford to covert small amounts of money since I owe ordinary income taxes on anything I convert. It's worth it to know I'll be able to access the Roth money without the fees, taxes and hasstles associated with the tax-deferred retirement accounts.
One of the greatest lessons I learned from the dot.com bubble and the so-called "Panic of 2008," was that I'm not smart. I do better when I put my investing on auto-pilot by diverting a percentage of my paycheck into my retirement account each month. If the stock market crashes, I'll just continue to pay down my home and invest only some of my money.
More from this contributor:
- Retirement Benefits
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- stock market