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.
On the other hand, if you are reaching the end of your accumulation years and/or entering the distribution phase of your life, you will not want to make any rash decisions based on the market’s short-term volatility. The worst thing you can do is to fall prey and “sell low” because you are panicked. So, give yourself a 10 day breather after any big market event – whether up or down – and give me a call before you make any buy or sell decisions. There may be some tweaking we can do to your portfolio to help you get through the volatility, without selling out when the market is down.
No matter which stage of investing you are in, the message I am trying to communicate to you is this: if your financial plan and investment strategy was sound a week ago, it is still sound today. Unless something has changed in your life, it is unlikely that you should take radical action. If you feel like your portfolio does not reflect your goals or risk tolerance, then now may be a great time to schedule a financial checkup to review your portfolio. Otherwise, remember that you are investing for the long-term, and this short term volatility will eventually pass.
Expect the market to be volatile this year. In addition to the recent recession fears (the media is not our friend in this case), we are in an election year, so expect more volatility in 2008. However, this too shall pass! Keep focused on your goals, post them in plain sight and review them often.
Probably the best advice I can give you is something I heard a CNBC analyst say this morning (while we waited for a low opening on Wall Street): “If you’re investing for more than 12 months, you should turn the news off, it doesn’t affect you today”.