One of the hardest parts of investing has nothing to do with numbers. It comes down to how people react when markets move. “Emotions are not helpful when it comes to your money,” financial expert Suze Orman wrote in a post on her website last week. When stocks fall, fear can take over. When they rise, excitement can push people into risky decisions.
Orman says that the S&P 500 had many swings last year, but that it rebounded strongly in the end, climbing more than 14% over 12 months. Anyone who sold or stopped investing likely missed out.
That kind of reaction is exactly what Orman warns against. Short-term moves, whether driven by headlines or fear, can result in decisions that hurt long-term returns.
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Orman stresses the importance of having a clear plan before volatility hits. First, investors need to decide how much of their portfolio belongs in stocks. The right number depends on age, goals and financial needs, and it should change over time.
“Most of you need some stocks because they offer the best chance of earning inflation-beating gains,” she wrote. “That might be 50% of your overall investments, or 40%, or 60%, or more. It’s your decision based on your current needs.
She also emphasizes that people should never rely on the stock market for current living expenses. Keeping two to three years of expenses in cash can help avoid selling investments during downturns.
Diversification is another key part of her approach. Orman recommends keeping at least half of a stock portfolio in low-cost index funds or ETFs, adding that “it is perfectly fine to keep 100% in index funds.” For those who pick individual stocks, she warns that no single holding should exceed 5% of a portfolio.
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Time horizon matters just as much. Money needed in the next five to seven years should not be invested in stocks. “History shows that when we are patient—five, seven, or ten years—the market tends to recover from down periods, and builds wealth,” she said.
Finally, Orman suggests using dollar-cost averaging. Instead of investing a large sum all at once, spreading investments over time can reduce stress and remove the pressure of trying to time the market. Regular contributions to retirement accounts already follow this approach. “If you have $5,000 to invest, you might invest $1,000 a month for the next five months, rather than stress about if and when to put the entire $5,000 into the market,” she added.