I invested a little more after the stock market crash of March 2020, but I didn’t do it anymore because I was scared. Not by the stock market – I knew I was going to recover.
What scared me were the unemployment figures. Every week, millions of people were suddenly out of work.
I looked at my savings and expenses. Ultimately, what I called a “six-month emergency fund” was nowhere near. In a prolonged period without income, I may well have been forced to dive into my savings for retirement.
But the next time the market plummets, I will be prepared. Here is my Roth IRA investment strategy for the next stock market crash.
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I’m maximizing my Roth IRA, no matter what
Regardless of what the stock market does, I am maximizing my Roth IRA in 2021, avoiding a major invisible emergency, as I did in 2020. As I am under 50, this means that I will contribute $ 6,000. I am doing this at an average dollar cost of $ 500 a month.
By investing regularly, I am not only preparing for a bear market – I am also preparing for the possibility that the market will skyrocket. Since I am investing automatically, I will pay a premium in some months, but I will also enjoy low prices in others.
I will contribute an extra for every 5% that the S&P 500 falls
Of course, I prefer to buy more shares when they go on sale. Therefore, for every 5% drop in S&P 500 index, I will contribute an extra $ 500. This means that if the index drops 30% in March, my contributions for the month will total $ 3,500, not $ 500.
If that happens, I will reach the Roth IRA contribution limit only in the middle of the year. But if I maximize my Roth IRA early, I can continue to invest $ 500 a month in addition to what I booked through my employer’s 401 (k) plan. Instead, I will invest the extra funds in a taxable account.
This could be a short-term money loss strategy, as stocks could suffer a prolonged decline over several months. But the market has recovered from every break in history, and I am confident that putting extra money on the market after the stock goes down will be a winning move for my Roth IRA in the long run.
The beauty of investing in a Roth IRA while the market falters is the fact that the eventual recovery (and the accompanying gains) happen in an account that will never be taxed, as long as I follow the rules. I’m in my thirties and I hope I don’t need to touch that money for another 30 years or more. The potential for tax-free growth is incredible.
When I will not invest extra
If my emergency fund falls below $ 25,000 for any reason, I will no longer be in a position to invest more, even if the market drops 5% or more. In this scenario, I will invest the set of $ 500 in my Roth IRA monthly, while rebuilding my emergency savings. And if something drastic happened, like a serious illness or job loss, I would reevaluate the $ 500 contribution as well.
My emergency fund is my best defense during a weak market. This prevents me from having to withdraw my shares when they are low, because otherwise I cannot afford a large expense. Sometimes, you have to play defense, and it’s okay if you can’t take advantage each opportunity.
My strategy will change based on my life
I spent a large part of 2020 accumulating my savings. So I bent over and focused on becoming debt free. I paid $ 12,000 in the last 12 weeks of 2020. I did this as a freelancer, setting aside $ 1 of every $ 2 I earned for taxes.
If I had ignored my savings, made minimal debt payments and invested every extra penny, I would have been a bad guy last year. My emergency savings fund earned less than 1% last year. My debt was relatively low-interest, so my savings paled in comparison to the return I could have enjoyed. In fact, the S&P 500 is 75% above the minimums reached in March 2020 at the time of writing this document.
However, I don’t regret those decisions for a second. I had no way of knowing that we were about to witness the fastest stock market recovery in history, or that I would be one of the lucky ones to keep their jobs. By clearing my debt balance, I also reduced the amount I need to prepare for an emergency.
The circumstances of my life, not the stock market, will always be the main driver of my investment decisions. My age, my savings, my job stability and my retirement goals are more important than what the stock market is doing.
It would have been great to maximize my Roth IRA in March and get unbelievable returns, but having solid savings and low expenses is the best way to protect my investments.
I worked hard in 2020 to get to the point where I am financially secure enough to take full advantage of the next stock market crash. In 2021, I am ready to attack.