The US stock market took a heartbreaking plunge on Monday, but the major concern for investors is what lies ahead.
All three major indices tumbled over fears that the delta variant of COVID-19 could threaten the global recovery. The Dow Jones Industrial Average suffered its biggest drop of the year at 2.1%, while the S&P 500 fell 1.6% and the Nasdaq 1.1%.
Some analysts are already worried that this could be the start of a bigger correction of 10% to 15% – a crash that personal finance icon Suze Orman has been predicting for months.
Here’s an explanation of where the concern comes from and some techniques you can use to grow your investment portfolio even if the market goes south.
What does Suze Orman think?
Suze Orman has been eagerly following the market for decades. She knows ups and downs are to be expected, but what she’s seen lately worries her.
“I don’t like what I see happening in the market right now,” Orman said in a video for CNBC back in April. “The economy has been terrible, but the stock market is moving.”
At that time, the Warren Buffett indicator — a measure of the ratio of the total value of the stock market to US economic output — was already climbing to previously unseen levels.
While investing is now as easy as using a smartphone appOrman was convinced that the runaway bull market would not last.
She cited new coronavirus variants and investment fads like GameStop as issues to watch — but in the end she felt it had just been too long since the last crash.
“This reminds me of 2000 again,” Orman said.
Jim Cramer says come on
While many investors are skittish, another CNBC mainstay sees no reason to panic for the time being.
“There’s just so much fear in the market”, crazy money host Jim Cramer said Monday. “And I just think… that the death toll isn’t increasing that much, so I don’t believe this is the end of the bull market.”
Many of the hardest hit stocks were companies heavily involved in the economic recovery—think airlines, cruise lines, and manufacturers like Boeing and Caterpillar.
Cramer says he’s happy to see the market fall further before picking up some shares on sale.
“Keep it coming…I think 3% to 5%,” he says.
How to prepare for a crash?
Orman has three recommendations for building a simple investment strategy to help you successfully navigate tight turns in the market.
1. Buy low
Part of what makes Orman so upset about the fury over meme stocks like GameStop is that it goes completely against the interests of the average investor.
“You all screwed up your head backwards,” she says. “All you want is for these markets to rise and rise. What good is that to you?”
She points out that the only extra money most people have goes to: investing for retirement in their 401(k) or IRA plans.
Since you probably haven’t planned on touching that cash for decades, the best long-term strategy is to buy low. That way, your dollar will go much further now and leave plenty of room for growth in the next 20, 30, or 40 years.
2. Invest on a schedule
Although she prefers to buy low, Orman does not recommend that you stop investing completely if the market is rising.
She wants informal investors not to get caught up in the daily ups and downs of the market.
In fact, cheering for a downturn may now be your best bet to get a bigger share of highly profitable investments – as some lucky investors were able to do in 2007 and 2008.
“When the market went down, down, down, you could buy things for nothing,” Orman says. “And look at them now, fifteen years later.”
She suggests that you set up a dollar cost averaging strategy, which means investing your money in equal parts at regular intervals, regardless of the fluctuations of the market.
This kind of approach is easy to implement with one of the many investing apps currently available to DIY investors.
There are even apps that can do that automatically invest your change by rounding your debit and credit card purchases to the nearest dollar.
3. Diversify with Fractional Stocks
To help avoid dips in specific corners of the market, Orman recommends diversifying your investments — balancing your portfolio with investments in many different types of assets and sectors of the economy.
Orman particularly recommends investing in fractional shares. This approach allows you to buy a portion of a stock for a large company that you could not otherwise afford.
With the help of a popular stock trading tool, anyone on any budget can afford the fractional stock strategy.
“The earlier you start, the more money you have,” Orman says. “Just don’t stop, and when these markets fall, you should be so happy because your dollars are finding more stocks.”
“And the more stocks you have, the more money you’ll have in 20, 40, 50 years.”
What else can you do?
Whether a major crash is imminent or not, investors decades away from retirement can make that work for them, Orman said in the statement. CNBC video.
Prepare for the worst first and hope for the best. Since the start of the pandemic, Orman now advises everyone to have an emergency fund that can cover their expenses for an entire year.
Then to prepare for a comfortable retirement, she suggests that you opt for a Roth account, be that a 401(k) or IRA.
That will help you avoid taxes when you withdraw money from your retirement account, because your contributions to a Roth account are made after tax. Traditional IRAs, on the other hand, are not taxed when you make contributions, so you pay later.
If you find you need a little more guidance, work with a professional financial advisor, can point you in the right direction so that you can weather volatility in the market with confidence.
While everyone is drifting off course or correcting too much, you are firmly in the driver’s seat with your sunset years planned.