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.
Rebalance Once a Year: Just like keeping your car maintained, you should review and rebalance your portfolio once a year. You should have an asset allocation that is right for your risk tolerance, goals and time frame. Once a year, you need to review your portfolio to ensure that your assets are still allocated properly to meet your goals. Doing this periodic maintenance will help ensure that your portfolio performs well on a long-term basis, and will help you reach your investment goals.
Stay the Course: When the market gets volatile, your best bet is to stay the course. If you pull out of the market when it’s down, you could do more harm than good. In addition, if you pull out of the market with the intent of getting back in when the market recovers, you will likely miss the best days, months or even years of the market, which could result in a much smaller nest egg than if you had just stayed in the market.
It’s normal to be nervous when the market gets volatile, but it’s important to continue to follow your long-term investment plan so that you remain on the road to reaching your financial goals.