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A stock market drop makes four opportunities.
Unless you work in finance, it can be easy to forget about the stock market - that is, until it's down.
A big drop can send the economy and investors into a panic as it affects everything from your investing portfolio to your 401(k) balance.
But markets are cyclical, and what goes up must come down. Even though it might seem like a bad sign that markets are down, it's generally just part of the ebb and flow of economic cycles over the long term.
However, there are a few ways that you can take advantage of stock market dips. These four things get easier when the market is down:
1. It's easier to see why dollar cost averaging is essential
Dollar cost averaging is a strategy where an investor regularly buys a set amount of stock, no matter where the market is at that time. By spreading your investments out over time, you could lessen the impact of market ups and downs, and smooth the ripples of the stock market when stocks are held for many years.
The opposite of this strategy, called 'timing the market,' relies on waiting for lower costs to buy, and higher costs to sell. Experts generally recommend against timing the market, and financial planner Howard Hook of EKS Associates in Princeton, New Jersey says that dollar cost averaging is a better move.
Hook suggests his clients ignore the market fluctuations. "We're not market timers. We're doing long-term buy and hold," he says. "If you have cash and you're ready to invest, now should be no different than any time. Market timing would say wait to get in or get out."
2. It's cheaper to buy more shares of stocks
"Lower prices, in essence, will result in buying more shares," Hook says. "In the long run, you may wind up with more money because you've bought more shares at a lower price." It might sound counterintuitive to keep buying while the market is down, but it could benefit you if you're planning to hold them, giving them a chance to rebound over several years.
"It's a temporary decline," Hook says. While stock prices might be low at the moment, buying now and holding onto stocks for many years could allow your shares to grow in value, sell for more, and eventually leave you better off.
3. Borrowing can get cheaper when interest rates are low
A change in the stock market's performance can mean a change in the federal funds rate. When the stock market is down, the federal funds rate - the amount banks pay to borrow money - is generally also lowered to spur spending and grow the economy.
A low federal funds rate makes it incredibly affordable to borrow money for any reason, from personal loans to car loans. If the stock market is low and the federal funds rate has fallen, the situation could work in your favor if you're in the market for a loan.
4. It's easier to focus on other parts of your financial plan
When the markets are down, it's time to leave your investments alone. As counterintuitive as it sounds, doing nothing is the best way to handle the ups-and-downs of the stock market.
"The fact that the markets are down doesn't change your goals," Hook says. "We suggest clients focus on some of the other areas of the plan that that need to be addressed, or should be reviewed."
It's a good time to sit down and focus on some of the often-overlooked parts of financial planning - things like tax prep, estate planning, wills, and insurance.
"I think a lot of times people want to do something," Hook says. Spending time on other parts of your financial plan can be a good way to take your mind off the markets and do something productive.
Disclosure: This post is brought to you by the Personal Finance Insider team. We occasionally highlight financial products and services that can help you make smarter decisions with your money. We do not give investment advice or encourage you to adopt a certain investment strategy. What you decide to do with your money is up to you. If you take action based on one of our recommendations, we get a small share of the revenue from our commerce partners. This does not influence whether we feature a financial product or service. We operate independently from our advertising sales team.
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