When the Road to Investing Gets Bumpy

Investing in the stock market is a lot like driving on a long road trip.  At some point, you’re going to run into pot holes and rough patches.  When that happens, you should definitely drive with more caution, but you have to keep on going if you want to reach your destination.

Similarly, if you’re investing for long-term goals such as retirement, you will encounter some market volatility, probably several times along your journey.  While you may be tempted to pull over and wait out the rough times, it will delay or may even prevent you from reaching your goals.

So what should you do when the road to investing gets bumpy?

Buy Low, Sell High:  The whole premise behind investing is to buy low and sell high.  You can’t do that if you pull out of the market or stop investing when the market goes down.  If you’re investing for the long-term, you should be glad when the market is down, because then stocks are “on sale” and you can pick up more shares at a lower price.  Who doesn’t love a good sale?

Diversify: One of the best ways to defend your portfolio against market losses is to have a portfolio that is properly diversified.  If you review the history of the stock market, you’ll see that the best performing assets vary from year to year and that it’s not easy to predict which asset class will perform well in any given year.  Therefore, by having a mix of asset classes, based on your risk tolerance, your goals and your timeframe, you are more likely to meet your goals.  In addition, having a mix of asset classes reduces your risk of loss, since you won’t have all of your eggs in one basket.

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Does the market have you feeling squeamish?

As you read the headlines and hear the news, it’s almost impossible to avoid feeling a bit squeamish in today’s volatile market. You’re probably wondering what’s in store for 2008 after such a bumpy first few weeks. Unfortunately, it’s impossible for even the most brilliant economists to accurately predict the future.

The most important thing you can do during volatile market times is to have a plan, and to NOT make rash decisions based on emotion. During volatile markets, planning is essential to minimize your stress level. That doesn’t mean that you won’t feel nervous if your investments decline, but focus and confidence will help you fight the natural human tendency when it comes to your own nest egg to sell when the market is down. Remember the old adage “Buy low, sell high”? Now is the perfect time to “buy low”.

A well diversified portfolio is one of your best allies when markets are volatile. Remember, you are investing for the long term; even if you are retired your investment horizon could still be 20+ years. Market downturns can be great buying opportunities for the long-term investor. For example, your regular 401K contributions this month are purchasing more shares than 6 months ago. When you actually need these funds in 5, 10, or 20 years, chances are very good they will have significantly increased in value. So by buying when the market is low, you are actually leveraging your money to work harder for you in the future.

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