As an investment advisor who helps olim manage their American brokerage accounts, I’m often asked, “Why should I invest in the stock market if it drops?”
If you believe that the stock market only goes down, then investing in stocks is a big mistake. The people who tend to make money in the stock market aren’t investing for the short term. They realize the market can, and sometimes does, drop (even dramatically) but their long-term time frame allows for plenty of opportunity for the market to recover.
If you’re trying to make money and believe that the economy will strengthen, the stock market offers many possibilities. Remember: “possibilities” does not mean guaranteed gains; it includes the very real chance of loss.
Folks who can’t tolerate volatility should avoid the market. This doesn’t mean that you must panic, sell, and bury your treasure in your backyard. There are investing opportunities that aren’t based on stocks that may be appropriate for you.
One trick to avoid panic
A well-diversified portfolio is in a better position to weather market drops. If you only invest in a few stocks and those sectors are weak, your losses will be larger than if your investments were spread out among more sectors/stocks. Diversification is a good tool for mitigating risk, and allows those who otherwise may have a lower risk tolerance to stay invested in the market.
The most popular tools
Common investment tools for diversifying risk include using mutual funds, ETFs (Exchange Traded Funds), and money managers. Some of these approaches follow a “low volatility” model that can help lower risk, but not eliminate it entirely. Other tools can actually leverage your investment, making them move even faster than the market. If you bet in the right direction, that can be great. But beware… leveraged funds drop faster than the market in a downturn. Make sure you speak with a qualified investment professional before doing any investing.
To find out more about some of the different tools that people use to invest both using stocks and other tools (bonds, bond funds, etc.) watch the videos here.
Douglas Goldstein, CFP®, is the Director of Profile Investment Service, Ltd., which specializes in helping people who live in Israel with their US dollar assets and American investment and retirement accounts. He helps olim meet their financial goals through asset allocation, financial planning, and using money managers.
Published July 19, 2016. Updated June 2020