4 things millennials can learn from the U.S. stock market drop

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4 things millennials can learn from the U.S. stock market drop

On Monday, the Dow Jones Industrial Average lost almost 600 points, closing at its lowest total in a year and a half. The day started with a nerve-rattling 1,000-point dive before the index partially recovered.

To most analysts, there were a few factors driving this dip:

  • Concerns about China: China's Shanghai Composite fell 8.5 percent on Monday. China is the world's second-largest economy, and a key buyer of raw materials like iron and copper, so its performance matters worldwide.
  • Falling oil prices: On Monday, crude oil reached its lowest price since 2009. Sounds like this is good news at the pump, right? Not so fast. Energy companies are an important part of our markets, so falling oil prices can trigger alarm.
  • Interest rate speculation: The Federal Reserve has signaled they might raise interest rates. Theoretically, higher interest rates make banks less willing to lend, which could cause the markets to fall.

Many experts are preaching caution and patience during this dip. Consider the context: The S&P 500, for instance, has more than doubled since its low point during the Great Recession in 2009. CNN also points out that employment numbers are relatively healthy right now, and home prices are still rising, which is far more positive than our outlook was in 2008 and 2009.

So where does this leave us? Check out four basic lessons that millennials can take away from today's news.

1. Expect the unexpected.

The Dow lost over 1,000 points on Monday. Then it made a comeback. Then it dropped again. If you're certain what's happening next -- well, I'm not sure I believe you.

The lesson almost everyone should take to heart is to prepare for unexpected dips. For many people, investments are crucial to long-term financial health. But they may still want to stash away enough cash to stay afloat no matter what happens in the markets.

While common wisdom is to save three to six months of living expenses for emergencies, some financial advisors suggest saving as much as two years' worth of expenses to be safe.

2. Think about the long term.

We've established that the stock market can be tough to predict. If you were on the edge of your seat following Monday's rollercoaster, you might try shifting your mindset a bit.

Saving and investing are really about long-term financial well-being. This is especially true for millennials - many of whom believe today's common employer- and government-based methods of funding retirement may not be available when they're ready to leave the workforce.

As such, personal savings and investments could play a bigger role in retirement planning for millennials than they do for baby boomers or Generation X.

While it always depends on your individual circumstances, if you're young, one day or even one week of bad market performance probably won't harm your portfolio in the long run. What is more important for the average millennial is developing a long-term plan and sticking to it.

3. Diversify.

This might be the golden rule of investing: Don't put all of your eggs in one basket.

For starters, it usually makes sense for anyone who buys stock to target a variety of different industries. If you only own stock in energy companies, for example, the recent dip in oil prices might have you seeing red. But owning stock across a bunch of different industries might provide a better shot at stability if the markets turn sour.

Diversification extends beyond stocks, too. If your circumstances have you looking for more reliability, consider putting some money into assets like government bonds. Government bonds were among the only investments to weather the storm on Monday and are commonly acknowledged as safer bets.

4. Keep saving and investing.

The most important takeaway is just to keep going.

Getting educated is a great way to get started. Perhaps do some research and talk to a financial planner - or even just friends and family. Maybe look into retirement plans like 401(k)s and IRAs and find out whether your employer matches contributions.

Recent events shouldn't necessarily scare anyone away from investing in the stock market, either, but rather encourage them to do so keeping the longer term in mind. While everyone has different financial circumstances and goals in mind, common wisdom is to find a balanced approach that will leave enough for now but also support you in the future.

Bottom line

For anyone with a stake in the American stock markets, days like Monday are scary. When it comes to the long term, though, creating a financial plan and following through with it could help you prepare for unexpected stock market dips.

About the author: Mike Goldstein is Copywriter at Credit Karma. Since joining the team in June 2013, he's been delivering the financial know-how on the daily. When away from work, you can find Mike watching hockey, Twittering for hours and frequenting trivia nights.

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